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How Does Chapter 13 Bankruptcy Affect Your Credit in California?

On Behalf of | Aug 10, 2017 | Chapter 13 Bankruptcy

The two most common types of bankruptcy in California are Chapter 7 bankruptcy, a fast process that involves liquidation of property, and Chapter 13 bankruptcy, a longer procedure where debtors make monthly payments to keep their property while reducing or eliminating various debts. Chapter 13 bankruptcy can have negative short-term effects on your credit score, but for many Californians, the long-term benefits outweigh the initial credit score drop. Sacramento bankruptcy attorneys explain how much Chapter 13 bankruptcy affects your credit score, and how long Chapter13 bankruptcy stays on your credit report.

How Much Does Chapter 13 Lower Your Credit Score?

Your credit report is a collection of personal information and financial data about you. Your credit report displays a number called your “credit score,” which is calculated based on how often you made full and timely payments on your utility bills, student loans, car loans, or other payments. Other factors that impact your credit score include lawsuits, foreclosures, liens, and – as our Sacramento Chapter 13 attorneys will be discussing in this article – bankruptcy.

There are a few different systems for rating credit scores, such as the FICO score range scale and the VantageScore range scale. However, speaking generally, credit scores are divided into the following categories:

  • Excellent – 720 or higher
  • Good – 690-719
  • Fair – 630-689
  • Poor – 629 or lower

Lenders use your credit report and credit score to assess the risk of giving you a loan, which means your credit score affects the types of loans you can qualify for. The more payments you make in full and on time, the higher your credit score will be, and the easier it will be to obtain a loan with a competitive interest rate. On the other hand, a history of delinquent or partial payments will chip away at your credit score, making it harder to qualify for desirable loans.

Like a string of delinquent payments, a bankruptcy case will also have a negative effect on your credit score – at least in the short term. Depending on what your credit score was before you filed bankruptcy, your score might temporarily drop anywhere from about 130 to 240 points. Generally speaking, the higher your score was prior to bankruptcy, the more it will drop when you file Chapter 13 in Sacramento.

However, that does not necessarily mean all lenders will be unwilling to offer you a loan. Unlike Chapter 7 bankruptcy, which is meant for debtors who have limited financial resources, Chapter 13 is meant for high-income debtors who have the financial means to direct their disposable income into monthly payments for a period of up to five years. Because Chapter 13 requires commitment to a long-term repayment plan, lenders may look more favorably upon Chapter 13 debtors than Chapter 7 debtors.

How Long Does Chapter 13 Stay on Your Credit Report in California?

A Chapter 13 bankruptcy will remain on your credit report for seven years. The seven-year clock starts counting down from the date you file bankruptcy, not the date your case is discharged. This distinction is significant for Chapter 13 debtors, because Chapter 13 bankruptcy requires a period of either three or five years for discharge, depending on your financial circumstances and the structure of your “reorganization” (repayment) plan.

After seven years, the record of the bankruptcy should be removed automatically, without you needing to take any action. However, it is still a good idea to periodically check your credit report in case there are any mistakes or inaccuracies. Checking your credit report can also help you detect identity theft, and help you manage your finances more effectively. You are entitled by federal law to receive one free annual copy of your credit report from each of the three major credit reporting bureaus: Experian, TransUnion, and Equifax.

Chapter 7 bankruptcy takes longer to come off your credit report than Chapter 13, because unlike Chapter 13 debtors, Chapter 7 debtors are not required to make monthly payments. Chapter 7 bankruptcy will stay on your credit report for 10 years before it is removed. Nonetheless, there are many debtors who would benefit more from Chapter 7 than they would from Chapter 13. Our Sacramento Chapter 7 bankruptcy lawyers can help you determine which chapter of bankruptcy is right for you.

Sacramento Bankruptcy Lawyers Can Help

Filing bankruptcy in California will temporarily have a negative effect on your credit score. However, if you are considering bankruptcy, it is likely due to excessive debt, which means you likely have a low credit score already. By wiping out many of your debts, bankruptcy can free up your finances and give you a fresh start, which positions you to build better credit going forward.

To learn more about filing Chapter 13 or filing Chapter 7 in Sacramento, Roseville, Folsom, or the surrounding area, call the California bankruptcy attorneys of The Bankruptcy Group at 888-710-4334 for a free bankruptcy consultation. Your information will be kept confidential.