How Filing for Chapter 13 Bankruptcy Can Legally Affect Your Credit

Filing for bankruptcy in any form will have an adverse impact on your credit rating for as long as it appears on your credit report. However, filing under Chapter 13 if you have the ability to reorganize your finances may cause less damage than filing under Chapter 7 and allow you to regroup faster. This is because Chapter 13 provides a greater opportunity for you to pay your debts. Instead of exempting or liquidating your assets, as you would under Chapter 7, you will make monthly payments that will be distributed to creditors. Unless your Chapter 13 plan does not include paying unsecured debts, a future lender will be less concerned about the bankruptcy on your record and the risk that a potential loan will not be paid back.

On the other hand, filing for Chapter 13 instead of Chapter 7 probably will not greatly affect your credit score. Most people who are filing for bankruptcy have experienced significant financial difficulties for a long time, so they probably do not have a strong credit score. It may be so low already that filing for any type of bankruptcy will not have a significant impact. If it is not very low, it will drop sharply regardless of which chapter you use.

Getting New Credit During Bankruptcy

A debtor who files under Chapter 13 is expected to focus on keeping up with their payment plan rather than accumulating new debt. Thus, they may not be allowed to take on new credit. If they fail to keep up with these payments or integrate them into the plan, they run the risk of having their Chapter 13 bankruptcy dismissed. You can consult an attorney to help you determine whether new credit is an option and ask the court for permission to pursue it. Some but not all lenders will be open to providing credit to a debtor going through Chapter 13.

Getting New Credit After Bankruptcy

Assuming that you successfully complete a repayment plan under Chapter 13, you will get a discharge that will show that debts covered by the bankruptcy have been removed. You should be able to get new credit at this point, although you should make sure to keep up with payments and avoid accumulating too much debt too fast. Lenders may charge more interest when you have a Chapter 13 bankruptcy on your record, but interest rates will go down as you show that you can handle the debt responsibly. Over time, your credit score will improve as well.

After you complete your bankruptcy, you should get copies of your credit report from each of the major bureaus. This will allow you to verify that the record reflects a discharge rather than a dismissal of your bankruptcy. (A dismissal means that the bankruptcy was not completed successfully.) Also, you should make sure that all of the debts that were included in the Chapter 13 proceeding are marked as having been included. Any errors or omissions may cause a lender to incorrectly conclude that you have not paid off the debt.

A Chapter 13 bankruptcy case will appear on your credit report for seven years after you file. Since the case lasts for three to five years, it will appear for two to four years after the discharge. By contrast, a Chapter 7 bankruptcy case will appear for 10 years. This is a potential reason to choose Chapter 13 over Chapter 7.

Last reviewed October 2024