November 29, 2019

Best For My Credit Score? Chapter 7 Bankruptcy Or Chapter 13 Bankruptcy.

The biggest difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy relief is that the latter is a debt repayment plan.  So, does a debtor get more credit score love under Chapter 13?  Afterall, the debtor is making payments on the debt, whereas Chapter 7 debtors are escaping their debts. Short answer…Both are bankruptcy. However, under a successful chapter 13 repayment plan your credit may rebound sooner.  It is important to shift your short term focus away from your credit score and focus on the rebuild.

About 4,000 bankruptcy cases are filed annually in Toledo, Ohio. About 10% of these bankruptcy cases are Chapter 13 repayment plans.  Some debtors repay 100% of their debts within 3-5 years, while some will repay a lesser percentage over a 5 year period.  Given this contrast, why would anyone ever consider a Chapter 13 bankruptcy repayment plan?

What will my credit report look like after bankruptcy?

We encourage our clients to get a free annual credit report from Transunion, Equifax, and Experian prior to filing for bankruptcy relief [] .Whether you are filing for bankruptcy relief under Chapter 7 or Chapter 13, your credit will be negatively impacted for several years by your bankruptcy filing.  However, Chapter 13 debtors who successfully complete their bankruptcy repayment plan may find themselves accelerating their financial recovery.  Again, it is important to focus on the rebuild as opposed to the length of time that bankruptcy is reflected on your credit report.

Will My Creditors Be Happier If I Choose Chapter 13 Over Chapter 7 Bankruptcy?

At the end of the day your creditors simply want to be paid.  A Chapter 13 repayment plan implies that the creditors will be paid to some extent, so yes most creditors would prefer Chapter 13 bankruptcy over Chapter 7 bankruptcy. Chapter 13 bankruptcy offers some hope that the lender will receive payment. Thus future creditors often see it as more desirable or having less impact on your credit. In contrast, unsecured creditors (i.e. medical, credit cards, car repossessions) are typically not paid in a Chapter 7 case.  Again, debtors should stay focused on financial recovery moving forward and not on the feelings of creditors.

Life After Bankruptcy…. Obtaining Credit

Life will go on and most people receive many credit offers.  After working hard for a fresh start, it is important to work diligently in rebuilding your credit.  A little planning in the beginning can pay big dividends later.  Expect to find higher interest rates in the first few years following a bankruptcy.  Chapter 13 bankruptcy filers should discuss new credit with their lawyer before signing for any new obligations. Chapter 13 bankruptcy generally prohibits debtors from acquiring new credit during the repayment period, unless court permission is granted.  After the successful conclusion of your bankruptcy case, you will receive an Order of Discharge from the bankruptcy court. This is when your fresh start begins.  

Example:  Following her bankruptcy discharge, Cathie obtains a new MasterCard.  Her new credit card offers a $5,000 credit line and an interest rate of 25%.  Cathie’s goal is to rebuild her credit, but she would prefer a low risk approach.  In a typical week, Cathie will go grocery shopping and put gas in her car.  These are usually cash transactions.  As part of her credit rebuilding plan, Cathie chose to use her new credit card for both groceries and gas.  She pays off the credit card weekly using the cash she had already set aside for groceries and gas.  Interest rates are irrelevant so long as the card is paid off.  As a bonus, Cathie researched the various credit card “rewards programs” and is also earning miles for a future vacation.  Meanwhile, life goes on and her credit rebuilds.