What happens to your credit score if you file Chapter 13?

If you are considering filing Chapter 13 bankruptcy due to high medical costs, unemployment, death, divorce or simply poor money management it's likely your credit score is already low due to late payments, serious delinquencies, collections, and/or judgments. So what will happen to your credit score if you file Chapter 13 bankruptcy? Your score could drop even lower.

Additionally, although Chapter 7 bankruptcy allows for an immediate discharge and the ability to begin to immediately repair your credit score, if you have been forced to file Chapter 13 bankruptcy, rebuilding your credit rating could take longer because you will not be able to get new credit until your Chapter 13 bankruptcy case is complete (without getting permission from the bankruptcy trustee).

So while your Chapter 13 bankruptcy case may take three or five years to be discharged, your ability to rebuild your credit and increase your creditor score could be limited.

Chapter 13 bankruptcy and credit scores

Chapter 7 bankruptcy is a liquidation bankruptcy and allows creditors to discharge certain unsecured debts immediately. Chapter 13 bankruptcy, however, is for debtors with high income or high amounts of disposable income. Chapter 13 allows debtors to create a 3 or 5 year debt repayment plan to repay their debtors. Like Chapter 7 bankruptcy, Chapter 13 will initiate an automatic stay and will stop many collection actions such as home foreclosures, bank account levies, wage garnishments and repossessions.

What can I do to rebuild my credit score after Chapter 13 bankruptcy?

There are several steps you can take to rebuild your credit, and although it may be tough to rebuild your credit rating immediately after filing Chapter 13 bankruptcy, it will not be impossible.

The first step is to avoid borrowing money too quickly after bankruptcy but rather focus on creating a budget and making timely bill payments each month. If you can borrow money, however, this could be another way to establish yourself as a good credit risk, although you should expect to pay higher interest rates and penalties.

Next, start to save at least 10% of your income. Not only will this help you pay your bills on time, but if you ever hope to buy a home you will also have money for a down payment. Also avoid predatory-lending scams and payday loans. These types of loans are very expensive and could cost you as much as 400 percent interest.

Finally, make sure to monitor your credit report and check your credit scores. Credit reports should be requested at least once a year from all three major credit agencies (Equifax, Experian and TransUnion).

If you find errors, missing and/or inaccurate information regarding current residence, employment and personal contact information on any of your credit reports, contact the credit agency immediately and have the information repaired. It is also recommended that you avoid credit repair agencies and work with the credit bureau on your own to correct mistakes.