Filing for chapter 13 bankruptcy can seem like a daunting task, but it’s often the right move for those who are facing foreclosure, repossession, or have exorbitant debts. If you’re thinking of filing for chapter 13 bankruptcy, you may have questions regarding how it will impact your credit score. In this blog, we discuss how chapter 13 bankruptcy affects your score, how long you can expect bankruptcy to remain on your credit report, and we share invaluable tips for building credit when you file for bankruptcy.
There are different factors determining how chapter 13 bankruptcy impacts your credit. If you have a good credit score, your number will likely take a hit when you file. If you have a poor credit score or if you don’t have one at all, filing for bankruptcy can actually help your score improve.
Your Chapter 13 bankruptcy will remain on your credit report for seven years once you file. After seven years, the three credit reporting agencies — TransUnion, Experian, and Equifax — will drop it from your report. Fortunately, the seven years includes the time in which you pay your chapter 13 repayment plan, so if you’re on a five-year payment plan, your bankruptcy will only remain on your credit report for an additional two years after you complete your plan.
Once you file for chapter 13 bankruptcy, you can immediately start building your credit report up to a healthy rating. Some of the ways in which you can build credit when filing bankruptcy include:
Re-establishing a good credit rating requires using credit. Your credit interest rates and fees may be higher because of your bankruptcy status, but it’s important to continue building your credit score through new lines of credit. Opening new lines of credit and making on-time payments shows the credit bureaus that you handle credit responsibly, and you’ll build up your score as a result.
It’s important to take into account that applying for new lines of credit often leads to companies making hard inquiries into your credit report. If multiple companies make hard inquiries into your credit over a short period, that can hurt your credit score.
If you feel that you’re likely to be rejected from some companies, consider applying for a secured credit card. It’s easy for people with lower credit scores to receive a secured credit card because it requires you to pay a security deposit.
Finally, before you apply for new credit, talk to your attorney. Some jurisdictions allow a person in a Chapter 13 to incur a loan or line of credit for a set amount without applying for Court permission. If you are going to get a loan for over that amount, the law requires you to seek a court order to get approved for new debt.
If you’re having difficulty earning approval for credit opportunities, consider adding a cosigner. It’ll greatly enhance your likelihood of receiving approval so that you can start building your credit score.
Additionally, you can become an authorized user on someone else’s credit card. When you become an authorized user, credit payments on that card will show up on your credit report. With regular, on-time payments, your score will improve.
Although signing up for new lines of credit will improve your score, you need to stay on top of your payments. You need to make all of your payments on time or else your credit will suffer. To stay on top of your credit payments, consider:
- Setting reminders for yourself to make payments.
- Enrolling all of your monthly payments in autopay.
- Paying off your cards more than once a month rather than letting the credit amount accumulate.
- Organizing your personal finances to pay off cards in full every month.
When signing up for different lines of credit, it’s important to keep your credit utilization rate low. An ideal credit utilization ratio is below 30%, so, for example, if you have access to $10,000 worth of credit, you want to utilize less than $3,000 in any given time to have an optimal credit utilization rate. Having a low credit utilization rate shows lenders and credit bureaus that you’re more likely to make payments on time, so it will improve your scores.
Bankruptcy attorneys can help you through the process of declaring chapter 13 bankruptcy. Filing can often become overwhelming and hiring an experienced bankruptcy attorney will help make the process easier and less confusing.
If you are an Indiana resident looking for experienced bankruptcy lawyers in Indiana, contact the law office of Sawin & Shea, LLC. Our lawyers have years of experience assisting Indiana residents through the bankruptcy process. You can call our office at 317-759-1483, or you can schedule a free consultation by clicking here.