If you are considering filing for bankruptcy, you have probably evaluated the pros and cons. One of the disadvantages of filing bankruptcy is it will affect your credit score. Your credit score is essential in obtaining credit.
So, exactly how does Chapter 13 affect your credit, and how can you boost your credit? How does debt relief affect your credit?
The Costs of Filing Chapter 13 and Other Alternatives
Although you are filing for bankruptcy to get out of debt, you will need to pay some filing and administrative costs. So, it is essential to know the cost of filing bankruptcy to avoid getting further in debt. The costs vary according to state, and you should look up the specific costs of your state.
If you cannot afford to file bankruptcy, it is essential to consider other debt-relief options to evaluate which one is best. Some alternative options include debt management and debt settlement. Some alternative options include debt management and debt settlement. Additionally, Insolvency Practice may be an option.
Chapter 13 vs Debt Relief Credit Score:
Chapter 13 bankruptcy does affect your credit score, but how does it work?
Chapter 13 offers bankrupt debtors a chance to repay their debts over extended years. Thus, it is best to avoid a more damaged credit rating. It is also easier to boost your credit score after filing Chapter 13. Before discussing how filing Chapter 13 will affect your credit rating, let us discuss what credit score is;
FICO Credit Score: What is it?
A credit score is a rating between 300 and 850 which serves as a measure of your creditworthiness. 300 is the lowest, and 850 is the highest score. A high credit score appeals to a lender and makes it easy to access credit at better terms and lower interest rates. On the other hand, a low credit rating makes it hard to obtain credit, and the credit is often offered at high-interest rates.
Here is a breakdown of factors considered in calculating your credit score;
- Payment history- 35% of your score
- Outstanding debts- 30%
- How long you have had your credit accounts for 15%
- A mix of credit you owe-10%
- New credit applications-10%
Your credit score can also be adversely affected by negative information like debt collections and bankruptcies. However, credit scores constantly change depending on your financial actions. The extent to which filing a Chapter 13 bankruptcy case will affect your credit score depends on your current financial situation. Therefore you shouldn’t expect a similar outcome with someone else who filed bankruptcy.
Now that we discussed how FICO works, let’s consider debt settlement vs bankruptcy.
How Debt Relief Affects Your Credit Score.
Debt relief companies such as Americor, Beyond Finance and Accredited Debt Relief provide debt relief services where the company would negotiate for a lower balance than is currently owed.
When the debt relief companies negotiate, the accounts are generally past due, so your credit score can drop. That said, after the company settles accounts, your credit may have a “paid settle for less” marking which could help improve your credit score over time.
How Low Can My Credit Report Points Get After Filing Chapter 13 Bankruptcy?
The extent to which your credit score will drop after filing for Chapter 13 bankruptcy will depend on your credit score before filing. If you had a higher credit score, you might experience a more significant drop in your credit score than someone who had a good and poor rating.
There is no exact estimate on how many your points will drop, however, some sources estimate you might lose as high as 200 points if you file for bankruptcy. But, if you have poor credit, filing bankruptcy can lower your points by 100 or less.
Irrespective of how many points you lose when you file bankruptcy, the record remains on your credit report for seven years, unlike a Chapter 7 bankruptcy report that remains for ten years. As you wait for seven years to get the record off your report, you can do some things to boost your credit. Besides, on completing your repayment plan, you might get bankruptcy relief, which will help jumpstart your financial recovery.
Tips on How to Boost Credit Score in Chapter 13 Bankruptcy
When you file your Chapter 13 bankruptcy case, you will develop a practical repayment plan for all your debts.
Bankruptcy is often the last resort option, but you may be able to do things that help boost your credit score.
You cannot incur new debt during this period without consulting the courts. You will need to file a petition with the court on the reason for needing new debt, and the court must approve. There is a lot you can do to improve your credit score while in bankruptcy.
You can start by working on your payments. Payment history contributes a significant proportion (35%) to your overall credit score. Ensure you make your payments on time according to the repayment plan or before their due dates. If you can, make extra payments on the debts when you have surplus income. Making timely payments through bankruptcy can boost your credit score significantly after the Chapter 13 case.
Another option is taking a secured credit card. A secured credit card requires you to make a deposit to serve as security for your credit charges for the month. It helps improve your credit score through bankruptcy. You can consult a bankruptcy attorney about getting a secured credit card and other tips on boosting your credit through bankruptcy.
Does Credit Score Increase after The Court Grants a Discharge?
Thankfully, you can rebuild your credit score after bankruptcy.
In most cases, your credit score will increase after the court grants you a Chapter 13 discharge. When the court grants a discharge, most or all of your unsecured debts are forgiven after completing your Chapter 13 repayment plan. On receiving a discharge, your debt to income ratio decreases, improving your creditworthiness and, consequently, your credit rating.
Another reason your credit score can increase after bankruptcy is that the court prohibits creditors from taking further action to recover the debt after filing. So, your creditors cannot report late payments or any negative information to credit bureaus. This works to your advantage and helps improve your credit score after bankruptcy.
Can I File for Credit after a Chapter 13 Discharge?
Yes, you can file and qualify for bankruptcy after Chapter 13 discharge. A report shows that although Chapter 13 filers are less likely to be eligible for new credit cards than Chapter 7 filers, they qualify for a slightly larger credit.
10 Ways You Can Improve Your Credit Score After Chapter 13 Bankruptcy?
After following through with your repayment plan and receiving a bankruptcy discharge, you can use these ten tips to improve your credit score;
- Get a free copy of your credit report from the major credit reporting bureaus. Go through every report to check for any errors and inaccuracies. All accounts in the bankruptcy section should show a zero balance
- If you note any errors, communicate with the lender and the bureau and follow up to ensure they are corrected
- Frequently check the credit report, preferably annually, to check for errors and mistakes and have them corrected.
- Always make timely debt payments, if possible, before the due dates.
- After making your payments, follow up to ensure the creditors report collection accounts
- Adopt healthy financial habits and always come up with a budget to keep your finances under control and avoid overspending
- Avoid overextending yourself even when anticipating a lump since it can hurt your credit score.
- Have an emergency savings fund for emergency needs to prevent you from taking credit in the future.
- Make use of what you learn during bankruptcy courses to manage your debt and make better financial decisions.
- If you must borrow money, only borrow an amount you are sure you can repay. Start with a low limit credit card after bankruptcy, and mix other types of loans like consumer and installment to build your credit.
Take Control of Your Debt Today
Debt relief can impact your credit score negatively, but what are your alternatives? Americor, Beyond Finance and Accredited Debt relief are a few options that provide this service, but then there’s Chapter 13 bankruptcy.
Although a Chapter 13 bankruptcy record can remain on your credit report for seven years, there are different ways you can boost your credit score. So, it is up to you to decide if you would prefer to file bankruptcy and get a fresh start in your financial life.
If you are in debt and would like to take control, get in touch with us today. We can help evaluate different debt-relief options and discuss them at length to identify the best solution for you. We can help you take control of your debt today. Some of the services we offer include managing debt, helping you improve your credit score, a convenient way to track all debt, comprehensive debt-relief options comparisons, and information to ensure you make the most of your new start after being debt-free.
