The Effects Of Chapter 13 Bankruptcy On Your Credit Score In Los Angeles County And Orange County

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In this article, you can discover…

• How bankruptcy will impact your credit score.
• Whether it’s possible to rebuild your credit score after filing for bankruptcy.
• The possible impacts of filing for bankruptcy on obtaining future loans.

How Will Chapter 13 Bankruptcy Impact My Credit Score?

While Chapter 7 Bankruptcy is primarily meant to eliminate all of your debt in one fell swoop over the course of 5 or 6 months, Chapter 13 Bankruptcy sets you up with a plan to repay your debts over several years. These payment plans are generally administered by a bankruptcy court and require monitoring by the courts. Creditors will take note of whether you are making your payments on time and what your plan percentage payout is, so they can determine when they will send you new credit card offers and offers to purchase vehicles on credit.

While it may take some time to rebuild your credit score, I can generally give clients a good idea of what is going to happen to their credit scores after a Chapter 7 by obtaining a copy of their credit reports. Chapter 13 bankruptcy is a bit more complicated, but we can piggyback on ideas from Chapter 7 bankruptcy to simplify the process.

It takes a longer time in Chapter 13 than in Chapter 7 for you to get a discharge. In either case, your credit will not be perfect, but it is not nearly as bad as many people believe it to be. In addition, the question I frequently ask my clients is, “Compared to what?” Compared to Bill Gates, or compared to the way things are for you just before you file your bankruptcy petition?

How Long Will My Chapter 13 Bankruptcy Reflect On My Credit Report?

While Chapter 7 will remain on your credit reports for 10 years, Chapter 13 bankruptcy will only be on your credit reports for seven years. However, there are three things that creditors look for in your bankruptcy reports to determine whether or not to lend you money, or extend credit to you.

First, creditors want to know with a high degree of certainty that you will eventually repay the principal in full.

This may be a shock to hear, but creditors are not charitable institutions. Creditors are in the business of making money through charging interest. Therefore, second, creditors will not lend you any money if they do not think they are going to make a return on their investment.

Third, creditors want to know with a high degree of certainty that you will make your payments on time each month. You can support these points by making large down payments on secured debts, which goes a long way toward convincing creditors of your reputability. So, while your Chapter 13 bankruptcy will stay on your records for seven years, you can still appeal to creditors on a case-by-case basis.

How Does Chapter 13 Look To Creditors As Opposed To Chapter 7?

This answer varies depending on the case. In Chapter 7, the ultimate purpose is to remove your debts entirely. When that happens, creditors view you as a good risk for two reasons. First, you just got rid of a lot of debt, which frees up future income to pay on future debts. Second, when you get a Chapter 7 discharge, you can’t get another Chapter 7 discharge for 8 years. This means that you have to pay any new debts.

In Chapter 13, however, creditors know that you will be in your plan for several years. Generally, most of my clients finish their plans. However, not all Chapter 13 debtors do so. Therefore, in a Chapter 13 bankruptcy, creditors may wait until you’ve been in the plan for a while before sending you offers.

It typically takes about a year before creditors approach you to begin borrowing money again. Creditors will view you more favorably if you are on a high percentage plan, as that suggests that you may be a better risk than a low percentage plan debtor.

Will Chapter 13 Bankruptcy Affect My Eligibility For A Loan In California?

You can still receive loans during the pendency of your Chapter 13 bankruptcy, but you must obtain permission from the Court in order to incur a debt. This is because the payments on the new debt will reduce the funds you have available to make the Chapter 13 plan payments.

You get the Court’s permission using a motion for authority to incur debt. Generally, the Court will grant this kind of motion as long as you want to borrow money for a necessity; such as the purchase of a new vehicle if yours has died.

I have handled cases of Chapter 13 bankruptcy where my clients were able to purchase homes, but only in cases where the parents had provided large down payments to help out. The judge is more likely to grant a motion to incur debt to buy a house if the mortgage payments are the same as whatever rent the debtors are currently paying.

Can I Rebuild My Credit After Chapter 13 Bankruptcy?

As I stated above, the theory is that you can start rebuilding your credit while you are in Chapter 13 bankruptcy. However, be wary of entities who claim they can repair your credit in two weeks, which can’t be done. To see this ask yourself, if there were a way to repristinate your credit in two weeks, would creditors take your credit reports seriously? Of course not. And yet they do take them seriously, which means that you can’t fix things quickly.

What I recommend to my clients is get two credit cards once you start receiving offers again, and use them to gradually create a new credit history by doing three things.

First, make more than the minimum payments, which will reassure the creditors that they will eventually get their principals back.

Second, do not pay the cards off. This means you’ll carry balances, which will accrue interest. This will satisfy the creditors’ need to make a profit.

Third, make the payments a couple of days early each month. This will reassure the creditors that you are reliable.

As you develop a good new credit history, the old history will recede into the mists of time. Gradually the available balances will increase and the interest rates will decrease.

How Would You Assist Clients Who Worry That They Will Lose Their Property Due To A Chapter 13 Bankruptcy?

I have worked with many clients who have worried about losing their property during a Chapter 13 bankruptcy. They are victims of a lot of misinformation floating around. To understand what’s a work, it helps to contrast Chapter 7 with Chapter 13.

In a typical Chapter 7, debts are discharged in one fell swoop without the creditors getting anything. From the creditors’ perspective this is a pretty big hit. Therefore, there are a few limitations. One limitation is on what the debtor gets to keep. If you are a Chapter 7 debtor, you get to keep those assets you can exempt from seizure by the Chapter 7 Trustee; but there is at least the potential for you to lose assets in Chapter 7. This idea of exemptions is a creature of personal bankruptcies, and does not exist in business bankruptcies. How does this work?

We list the debtor’s assets in the bankruptcy papers, and using the appropriate exemption table divide them into exempt and nonexempt categories. Although the Bankruptcy Code has an exemption table, California has opted out of it. Instead, we have two exemption tables: One for homeowners with equity, the other for everyone else — the so-called renter’s table. Each table has a list of asset categories. Some categories have dollar limits, others have no dollar limits. Our goal is to exempt as much of the debtor’s assets as possible by judiciously using the table. Anything we can’t exempt is fair game for the Chapter 7 Trustee to seize and sell for the benefit of the creditors.

In a Chapter 13, things are different. Instead of wiping out your debts, you make payments to creditors through the plan. Consequently, you keep all your possessions. However, we still list all of your assets as exempt or nonexempt, because the minimum you can get away with paying your creditors through the plan is the amount that they would have received in Chapter 7 — i.e., the dollar value of your nonexempt assets.

How Can You Assist Clients Who Are Hesitant To Pursue A Chapter 13 Bankruptcy?

One of my goals with my clients is to help them separate misinformation from fact. One way I do this is to show them what the law actually says — we look at the text of the bankruptcy code and any relevant case law — which is obviously much more accurate than what they heard from a friend or saw online.

One concern some clients have is embarrassment. However, the only people who will ever know that you have filed for bankruptcy are your attorney, the bankruptcy court, and your creditors. No one else will look at your bankruptcy records.

Moreover, according to Deut. 15:1-2, national bankruptcy was required every seven years in ancient Israel. God didn’t want the Israelites to be debt slaves. Who am I to argue with the King of the universe?

Indeed, bankruptcy is good for society because it provides a safety net for someone starting a business, and thus it encourages innovation. If your business fails, you can learn from the failure, and perhaps succeed with a second business venture.

For example, Milton Hershey started an unsuccessful candy business, which ended in bankruptcy. He learned from the failure and started his chocolate business, which was so successful that Pennsylvania now has a town called Hershey, that is the centre of production for the company.

In sum, bankruptcy can be a good thing. When you can’t pay your creditors in full, Chapter 13 bankruptcy provides a manageable way to deal with the debts.

Still Have Questions? Ready To Get Started?

For more information on Bankruptcy Myths, an initial consultation can point you in the right direction. Get the information and legal answers you are seeking by calling Attorney Nicholas Gebelt at (562) 777-9159 today.