Chapter 13 Review

Depending on your circumstances, you may not have a choice between filing for Chapter 7 or Chapter 13 bankruptcy. If you have the ability to reorganize your finances, however, filing for Chapter 13 may cause less damage to your credit score in the long run because you can start over faster than in Chapter 7.

Unlike in Chapter 7 bankruptcy, where you would liquidate your assets and start over, you keep your assets and make monthly payments to a trustee in Chapter 13. The trustee then pays your creditors off over time.

Declaring bankruptcy will drop your credit score regardless of which Chapter you file. If you are experiencing financial difficulties such that you have to declare bankruptcy, your credit score may not be that strong to begin with, and the bankruptcy will not have as great an impact.

If you declare Chapter 13 bankruptcy, the expectation is that you will pay off a portion of your debt through your payment plan and avoid accruing any new debt. If you do not keep up with the monthly payments, you may have your Chapter 13 bankruptcy dismissed. Check with your attorney first before you pursue new credit options.

Once you have successfully paid off your debts, you will receive a discharge that indicates all debts have been removed. You will then be able to secure new credit. But make sure that you can pay off your debts going forward, or you will wind up in the same position you were in before you declared bankruptcy. Lenders may charge you more interest initially, but that will go down when you’ve demonstrated that you are reliable and make consistent monthly payments.

Chapter 13 bankruptcies will remain on your credit report for seven years after you file. Most cases last between three and five years, so expect to see it disappear within two to four years of receiving your discharge.