The main issue that discourages most people from filing bankruptcy is the detrimental effect is has on their credit. It’s true that a bankruptcy can stay on your credit report for up to ten years and it seriously hurts your credit score. However, not filing for bankruptcy and allowing your debts to go to collections will also negatively impact your credit. Depending on the kind of bankruptcy you file, Chapter 7 vs. Chapter 13 bankruptcy, your credit score will decrease anywhere from 160 to 220 points. This is enough to take a good credit rating down to a fair or poor one. Since most lenders decide whether or not to extend you credit based on your credit score, a bankruptcy will make it much more difficult to qualify for an auto or home loan or credit cards. The primary remedy for this is time, though there are additional measures you can take to positively enhance your credit report and score. Ultimately, if you manage your new debts well, your score will gradually increase, and in time you will be able to run your financial life successfully, even if the bankruptcy has not yet dropped off your report.
Managing & Improving Your Credit Score After Bankruptcy.
Check Your Credit Score
It’s important for everyone to check their credit report regularly, but it’s most essential for those who have recently filed bankruptcy. Maintain a list of the debts included in your bankruptcy and check their status a few months after your debts are discharged. If you filed Chapter 7, these debts should show a balance of $0 and no longer be listed as delinquent. If something isn’t being reported correctly, ask the credit report issuer to make the change and check with the original lender.
Re-establish Credit as Soon as Possible After Bankruptcy Filing
Depending on whether you file Chapter 7 or Chapter 13, the bankruptcy will fall off your report in ten or seven years. However, if none of your accounts are more than ten years old, a bankruptcy may effectively put you in the same spot as an 18-year old with no credit history. Otherwise, it could create a virtual hole in your report, or a long time period in which it appears you had no credit at all. Therefore, it’s important to apply for credit soon after the bankruptcy is discharged in order to re-establish a credit history and rebuild your score. In spite of a blemished credit report, there are a few ways to begin this process:
• Secured Credit Cards: A secured credit card requires you to give the credit card company a lump sum of money, which they keep as collateral. You’re then issued a credit card with a limit equal to the collateral you supplied. These cards often come with fees, so review the disclosures and application carefully to make sure you won’t spend more than the card is worth to you. These cards are much easier to get than other credit cards, since the lender takes on no risk in extending you credit.
• Store Credit Cards: Store credit cards often have lower requirements to qualify, though they tend to carry high interest rates and fees. As always, it pays to read the disclosures and application carefully.
• Car Loans: Car loans are generally easier to get than other types of loans, especially if you offer a significant down payment. If you need to buy a car and can save money for a down payment, begin shopping within six months of completing your bankruptcy.
Do Your Homework on Credit Card Offers After Chapter 7
One thing that puzzles many people who file bankruptcy is that they receive multiple credit card offers right after their bankruptcy is completed. You’d think that a fresh bankruptcy would be a strong deterrent to lenders. However, the banks know you won’t be able to file again for several years, so you are actually a better risk than you were before. Just make sure to read the fine print on any new debt you apply for, as many companies intentionally prey on people who recently filed bankruptcy by offering new lines of credit stuffed with fees, minimum payments, and extremely high interest rates. Over time, reports from these debts will start to raise your credit score, provided you use credit cards and rewards wisely by paying by the due date and in full every month. Initially, the only lenders to extend you credit will probably be small banks and credit unions. But, within a few years, you may be able to get approved with the national banks, which is important because big names on a credit report can potentially sway future credit decisions like a home mortgage in your favour. The passage of time alone will increase your score. Plus, as long as your report is filled with nothing but A+ grades, you should have a decent credit score within a few years, and even a good score by the time the bankruptcy drops off your report.
Keep Your Oldest Accounts Active If You Can
Since many people who declare bankruptcy previously had good credit, older items on their report can help their credit scores even if they later declare bankruptcy. The “length of credit history” factor, which makes up about 15% of your score, is generally not affected by declaring bankruptcy. In other words, keep these older accounts active and intact whenever possible to maintain the length of your credit history.
Don’t Apply for Numerous Accounts
About 10% of your credit score is determined by whether you have applied for new accounts recently. While you will need to apply for new credit to begin rebuilding your score, keep the accounts to a minimum and spread out your applications over time. This is especially true if you apply for a large loan like a mortgage or car loan. Credit rating companies consider it a bad sign if you apply for a lot of new credit all at once. Another reason to limit the number of credit accounts you apply for is so you can manage the ones you have effectively and responsibly.
When Chapter 7 Is Better Than Chapter 13
Knowing the basic differences between Chapter 7 and Chapter 13 bankruptcy is a start, but it’s hardly enough to help you decide which type of bankruptcy is for you. Let’s start by taking a look at when Chapter 7 bankruptcy is better than Chapter 13.
Chapter 7 is better if
• you only have unsecured debt, like credit card debt, medical bills, balances owed after a repossession, personal loans, etc.,
• you don’t have a regular income or not enough income to cover your living expenses like housing and food,
• you can’t afford to hire a bankruptcy lawyer to help you with your bankruptcy case,
• you don’t have any non-dischargeable debts like alimony or child support or you’re current with your payments on these obligation,
• You’re not able to commit to a repayment plan for at least the next 3 years.
When Chapter 13 Is Better Than Chapter 7 Bankruptcy
If you have some disposable income and don’t have too much debt, you have the option to choose between Chapter 7 and Chapter 13 bankruptcy.
Chapter 13 is better
• you want to keep property that’s not protected by an exemption,
• you’re behind on your mortgage and want to catch up,
• you have debts that can’t be discharged,
• you have a car loan with a high interest rate or negative equity from a trade-in
• you have multiple mortgages
• you owe money to your ex-spouse from a property settlement
Of course, life isn’t always that clear cut, so it’s also important to consider the downsides when weighing your bankruptcy options.
Difference between Chapter 7 and Chapter 13 bankruptcy
Chapter 7 and Chapter 13 bankruptcy are two very different legal options with different potential consequences, but both can help borrowers who are over their heads in debt. Chapter 7 bankruptcies, also known as liquidation is a legal option that can help you clear some or all of your debt. But it will also mean having to surrender assets, like property or cash, to do so. Chapter 13 bankruptcies is also a legal option that can help you get some debt discharged, but allows you to keep your property and repay your debt by completing a three- to five-year repayment plan.
But before filing either type of bankruptcy, consider the type of debt you owe. Neither option lets you discharge the following:
• Child support
• Certain taxes
If your debts are outside of those categories and you’ve exhausted all your other options to repay them such as asking for help or credit counselling Chapter 7 or Chapter 13 bankruptcy might give you the help you need. Each has pros and cons, so it’s important to carefully consider which one, if either, is right for you. Chapter 7 is an option to consider if you have little to no disposable income. In fact, you’ll have to pass a means test to prove that you can’t afford to pay your debt in order to file.
What’s disposable income?
Disposable income is the amount that’s left over from your pay check or other income after you’ve paid for taxes and any necessities, such as housing costs, utilities and food.
Here are some things to consider if you’re deciding whether Chapter 7 bankruptcy is right for you.
It could reduce your monthly debt-repayment load
When you have a debt discharged through Chapter 7 bankruptcy, you’re no longer legally required to pay that debt back. That means the money you were paying toward that loan or credit card, for example, can now be used for other things, like household necessities. Note that there are a number of exceptions to the debts that can be discharged in Chapter 7, so we recommend contacting a bankruptcy lawyer before you file.
It can provide relief from debt collectors
If you can’t afford your unpaid debts, Chapter 7 can be a helpful tool to stop debt collectors from taking action against you. When you file, some of your creditors may be temporarily restricted from:
• Collecting money from you
• Contacting you
• Continuing wage garnishment
• Starting or continuing lawsuits against you or your property
You may be able to clear your debts faster with Chapter 7 than with Chapter 13
Where Chapter 13 bankruptcy typically takes three to five years to complete, Chapter 7 generally takes about 90 to 100 days from start to finish, in addition to the time it takes to complete a credit counselling course prior to filing.
You will lose some assets
One of the main consequences of filing Chapter 7 is the possible loss of your assets. Depending on the laws in your state, and whether you have equity in certain assets, your cash or property will be at stake.
Your credit could take a hit
The other major consequence of a Chapter 7 bankruptcy is the impact to your credit. A Chapter 7 bankruptcy can stay on your credit reports for up to 10 years from the date you file. That doesn’t mean you’ll never be able to open a credit card or take out a mortgage again, but it does mean you might have to pay a lot more in interest rates and fees when borrowing.
Should I file Chapter 13?
Chapter 13 is a bankruptcy option to look at if you own property that you want to keep.
If you have sufficient income, you may be required to file Chapter 13
To qualify for a Chapter 7 bankruptcy, you’ll have to prove you can’t repay your debt. If, depending on your income and your state’s median income requirements, your current monthly income is more than your state’s median income for a family of your size, you may not be allowed to file Chapter 7. In this case, Chapter 13 could be the right option for you.
It can stop debt collections and the foreclosure process
If you’re a struggling homeowner, Chapter 13 could be the help you’re looking for. Filing Chapter 13 can stop the foreclosure process and give you a chance to catch up on your past-due mortgage payments. And if you have debts in collections, any debts discharged during Chapter 13 means your creditors can no longer take any action to try to collect the money from you.
It can help you repay your debt
Chapter 13 can also provide a more convenient and cost-effective way to repay your debt. Through Chapter 13, you’ll make a plan to repay all or some of your debts. You can make one consolidated monthly payment toward your debts based on your repayment plan. This lump payment will then be distributed to your creditors. Your monthly payments may also be reduced for certain types of debts, so you can repay them over the course of your three- to five-year plan.
It can take three to five years to discharge your debts
Chapter 7 bankruptcy can help you discharge your debts relatively quickly, but the same isn’t true for Chapter 13. Under Chapter 13, responsibility for your debt doesn’t end until your repayment plan has been completed, which typically takes three to five years.
If you can’t stick to the repayment plan, you could lose your Chapter 13 status and maybe even assets
If you’re unable to make your payments under the plan, your bankruptcy case could be dismissed or converted to Chapter 7, which means you could again be in jeopardy of losing assets like your home or car. Your repayment plan could also be at risk of being dismissed or converted to Chapter 7 by the court if you fail to file required taxes during your case or if you fail to pay domestic support obligations, such as child support and alimony, after filing.
The impact on your credit may not be as severe
Like Chapter 7, Chapter 13 bankruptcy may have a very negative impact on your credit. A completed Chapter 13 bankruptcy can stay on your credit reports for up to seven years from the date you file. But some creditors could view a Chapter 13 bankruptcy more favorably than a Chapter 7 bankruptcy. It could be an indication that you repaid more of your debt. Bankruptcy is a major legal decision with serious consequences. Consider all your options before you decide to file for bankruptcy. Once you’ve considered all your available options and determined it’s the right course of action for you, the next step is to research Chapter 7 and Chapter 13. Chapter 7 and Chapter 13 bankruptcy will stay on your credit report for the same amount of time; about ten years. Although they both have the same effect on your credit score, a particular creditor reviewing your report to decide whether to lend you money might view one chapter more favorably than the other. In particular, a creditor might be more willing to lend to you if you filed for Chapter 13 rather than Chapter 7. Your credit report is important if you want to borrow money the potential lender will review the report to determine if lending to you would be risky. Those with good credit are a low risk and are more likely to get loans with good terms; those with poor credit are high risk and may have more difficulty. These lenders will look at your credit score and your overall credit history when deciding whether to lend to you. Your credit score is based on a multitude of factors, including the amount of available credit you have, the ratio of your balances due to your credit limits, your total amount of debt and any judgments or bankruptcies you have on record. Chapter 7 and Chapter 13 bankruptcy both affect your credit score the same having a Chapter 13 bankruptcy on your credit report will not be any better for your score than a Chapter 7. However, the individual reviewing your report will look at more than your score. A Chapter 13 bankruptcy involves repaying some or all of your debt over a three to five year period, while a Chapter 7 bankruptcy involves wiping out most of your debts without paying them back. Both Chapter 7 and Chapter 13 theoretically leave you in a good position to take on new debt, as they both free you from the burden of old debts and give you a fresh start. Beyond that, if you have a Chapter 13 on your credit report, a lender looking at your report may see it as a responsible way to handle your debt, because you made a good faith effort to repay your debts despite your financial hardship. In that way, a Chapter 13 may be better for your credit than a Chapter 7.
Utah Bankruptcy Lawyer
When you need a Utah Bankruptcy Attorney, please call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506