The Consequences of Chapter 13 Bankruptcy

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Today’s guest post comes to us from Wystan North. He has made his mark by writing on legal issues especially on filing bankruptcy procedures in different states.

The Consequences of Chapter 13 Bankruptcy

One of the strong points of choosing Chapter 13 bankruptcy over Chapter 7 is that it doesn’t reflect as badly on one’s credit. Since your creditors are still being paid and less debt is being discharged, your credit score doesn’t take as big a hit.

But, that’s not to say Chapter 13 is free of implications. Bankruptcy has a negative impact on your credit score; it’s just a matter of minimizing the damage. Here are some of the effects you can expect from a Chapter 13 bankruptcy filing and how you can control them.

FICO Score Changes

A Chapter 13 bankruptcy filing can take 80 to 250 points off your credit score, depending on how much debt you have and how much of it is discharged. This is mild compared to the 300 to 400 points often lost in a Chapter 7 filing. Generally, the more debt you can cover through the repayment plan, the less drastic the credit score change will be.

Bankruptcy Records

The bankruptcy itself will be visible on your credit report for seven years after the filing, whether it’s for a Chapter 7 or a Chapter 13 bankruptcy. But, since a Chapter 13 repayment plan lasts three to five years, there will only be two to four years left after your discharge. The bankruptcy will still be there while you’re on the plan, but it won’t count for much because your credit options will be limited anyway.

Loan Rates

Any type of bankruptcy will have an effect on the types of loans you can take out. With a bankruptcy on your record, banks may not be as willing to grant large loans, or at least give you prime rates on them. A Chapter 13 bankruptcy tells them that while you’re not as deep in debt as one who filed a Chapter 7, your paying capacity is still limited by your repayment plan. You may not be able to get the best car loan or mortgage while you’re still making payments, but small personal loans are usually easier to get.

Credit Limits

You may be able to get a credit card after filing Chapter 13 bankruptcy, but don’t expect a high credit limit. Most commercial banks will only give you a credit limit proportional to what you can afford considering the added expense of your payment plan. Some companies offer credit cards specifically for people with tarnished credit histories, but the rates are much higher and you risk falling back into default.

How about you all? Have you or any one you know had to file for Chapter 13 bankruptcy? How did it affect him/her?

Share your experiences by commenting below!

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