Chapter 13 Credit Reporting

Chapter 13 Credit Reporting

Many debtors feel nervous about how a Chapter 13 bankruptcy will impact their credit rating while they’re repaying their creditors. They wonder how damaging it will be to their credit rating.

In this article, we’ll try to alleviate some of your stress when it comes to Chapter 13 credit reporting in bankruptcy. There are means available to you to rebuild your credit and, as you may know, Chapter 13 isn’t as bad for your credit rating as Chapter 7 is.

Let’s take a look at a few facts to clear up any confusion.

Your Credit Report Is Already Bad

It may be hard to hear, but by the time you’re contemplating bankruptcy, your credit report is likely throwing up red flags everywhere to potential creditors. In fact, a debtor’s credit report is often worse BEFORE they file bankruptcy than afterwards. There is also the greatest potential for things to go wrong, such as a lawsuit, lien or other collection action taking place that can negatively impact a debtor’s credit report before they file bankruptcy than afterwards. In essence the debtor’s credit rating may actually improve after their bankruptcy filing.

Understanding Chapter 13 Credit Reporting

During a Chapter 13 bankruptcy the creditors are not required to report anything to the credit reporting agencies. Even though a debtor is making payments in their plan, those payments may not be reported to the credit reporting agencies.

On the other hand, some creditors will zero out the debtor’s balance after the bankruptcy filing. This, however, is not guaranteed. But whether or not a creditor zero’s out a debtor’s balance will not impact the fact that they cannot attempt to collect on the debt while the debtor is in bankruptcy.

Lastly, your credit report is not entirely important at the moment. Generally speaking a debtor is not able to obtain new credit while in Chapter 13 bankruptcy without the permission of the bankruptcy trustee. Because of this their credit rating during bankruptcy is not as important as their credit rating after their bankruptcy discharge.

What Happens After You Complete a Chapter 13 Bankruptcy?

Once a debtor has successfully completed their Chapter 13 bankruptcy repayment plan and the balance of their unsecured debts are discharge, their creditors are obligated to accurately report the credit balance as zero. If there is any debt that survives the Chapter 13 bankruptcy, those creditors are required to accurately report the balance and payments made to them after the bankruptcy. This might be the case for a mortgage, car note or student loans which survive the Chapter 13 bankruptcy.

Lenders Prefer Chapter 13 Bankruptcy to Chapter 7

Since Chapter 13 involves a repayment plan, creditors prefer this form of bankruptcy to Chapter 7. In some cases, even those who qualify for Chapter 7 can get some benefit from Chapter 13. This, of course, rests entirely on what kind of debt you owe. If it’s secured debt, then Chapter 13 is almost certainly the better choice.

Another reason it might be the better choice is that future creditors will not punish you quite as thoroughly as they will for a Chapter 7 bankruptcy. Chapter 13 bankruptcies also only remain on your credit report for seven years whereas a Chapter 7 will be there for the next ten years.

Chapter 13 Bankruptcy and Your Credit Score

As addressed earlier, Chapter 13 bankruptcy won’t hurt your credit score quite as much as Chapter 7. That being said, if your credit score is higher, then Chapter 13 will most certainly bring it down. Filing for Chapter 13 has to be a well-thought-out decision. If your credit is already bad, then it doesn’t matter. If your credit is decent, then it might.

As a baseline, if your credit score is around 650 or better, the Chapter 13 is likely to drop it into the 550 range. But if you’re missing payments and your credit score is down to around 600 (and dropping), it may be time to consider it.

When Is a Good Time to File for Chapter 13?

Today, the most common reason that people file for any kind of bankruptcy is medical expenses. This sad fact has not gone unnoticed by politicians and activists who claim that our health care system is broken. Once a creditor obtains a judgment against you in court, they can make your life a living hell. Not only can they garnish your wages, they can also place a levy on your bank account which allows them to freeze your funds. At that point, they can petition the court to transfer those funds over to them.

Additionally, they can place liens on your real estate. If you own properties other than your legal residence, they can force the sale of the properties to repay the debt that they’re owed. In other words, right about the same time they threaten to sue you and you know that they’re going to win that judgment, it’s a good time to start considering filing for bankruptcy.

Once in bankruptcy, your creditor’s hands are tied insofar as using aggressive tactics are concerned. Essentially, you have regained control of the situation and you can work out a repayment plan that works within your finances and prevents your creditors from seizing your money or property.

Obtaining Credit in a Chapter 13 Bankruptcy

Obtaining new credit while making repayments in Chapter 13 is difficult. The court generally frowns on it. On the one hand, your credit report won’t matter so much if you can’t get new credit. On the other hand, sometimes you really need a line of credit. For instance, if your car or a major appliance breaks down, you’ll need to replace it. When this happens, the courts and the bankruptcy trustee understand that securing this line of credit can actually save your Chapter 13 from being dismissed by the court.

Have Questions About Chapter 13 Credit Reporting?

Your credit report doesn’t matter so much while you’re in Chapter 13. Additionally, if your credit is already in the 500-600 range, a Chapter 13 is unlikely to hurt it much more. In fact, Chapter 13 can prevent your credit score from going into freefall. The successful completion of your repayment plan under Chapter 13 can give you the solid ground you need to begin rebuilding your credit. If you have any questions or concerns regarding a chapter 13 bankruptcy, the attorneys at Allmand Law Firm can help. Feel free to contact us today to set up a free consultation.