Life After Chapter 13 Bankruptcy

How Chapter 13 bankruptcy will affect your credit, and how you can rebuild credit afterwards.

by:  , Attorney

Filing for Chapter 13 bankruptcy allows debtors to keep their property and catch up on delinquent accounts such as their mortgage, car loans, or back taxes. Because of this, many debtors emerge from Chapter 13 bankruptcy with their assets intact and their accounts current. But despite its benefits, Chapter 13 bankruptcy can have a negative impact on your credit. However, there are steps you can take to rebuild your credit and avoid bankruptcy in the future. Read on to learn more about life after Chapter 13 bankruptcy.

For an overview of how Chapter 13 bankruptcy works, see our  Chapter 13 Bankruptcy  topic area.

How Long Does Chapter 13 Bankruptcy Stay on Your Credit Report?

According to the Fair Credit Reporting Act, a bankruptcy can only remain on your credit for up to ten years after your filing date. However, a Chapter 13 bankruptcy will typically be removed from your credit report after seven years. Keep in mind that the clock starts running when you file your case, not when you receive your discharge. Since most Chapter 13 bankruptcies last three to five years, chances are your Chapter 13 will only appear on your credit report for another two to four years after completing it.

Can You Obtain Credit During or After Chapter 13 Bankruptcy?

As discussed, Chapter 13 bankruptcy can last as long as five years. If you need to take out a new loan during bankruptcy, you will have to file a motion and obtain court permission first. Generally, the court will not oppose your request if you need to incur new debt for a valid reason (for example to buy a more reliable vehicle) and it will not affect your ability to make your monthly plan payments.

After you complete your Chapter 13 bankruptcy, you no longer have to seek court permission before applying for new credit. Each lender has its own procedures and guidelines for reviewing credit applications. As a result, how much you can borrow and the interest rate will depend on the lender. However, most debtors are able to easily obtain credit after Chapter 13 bankruptcy. Further, the effect of bankruptcy will continue to diminish over time, allowing you to qualify for better loan terms.

How to Rebuild Your Credit and Avoid Bankruptcy in the Future

The following are some of the steps you can take to rebuild your credit and avoid having to file for bankruptcy relief in the future.

Check Your Credit Report for Mistakes

Errors on your credit report can harm you when you are trying to rebuild your credit. Obtain a copy of your credit report and review it carefully for any mistakes. If you do find a mistake, contact the creditor and the credit reporting agency to make sure the information is corrected or updated.

Be Cautious When Obtaining New Credit and Keep Your Accounts Current

After receiving a discharge, many debtors begin receiving offers for new credit cards. Review the terms of these offers carefully as many of them will typically contain annual fees or high interest rates.

Alternatively, consider obtaining a secured credit card through your bank. To obtain a secured credit card, you generally must deposit an amount of money equal to your credit line into an account to serve as collateral. Avoid any cards that charge high fees and make sure your monthly payments will be reported to the credit reporting agencies.

If you obtain new credit cards, keep your accounts current by making timely payments each month. Also, since most credit cards have high annual interest rates, pay off your balance each month so interest does not accrue on your account.

Change Your Spending Habits

Many debtors file for bankruptcy because of medical expenses, job loss, or other reasons that are out of their control. However, if you had to file for bankruptcy relief because of excessive spending, consider reviewing your spending habits and changing them accordingly to avoid a future bankruptcy.

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