Most people considering Chapter 13 bankruptcy realize that filing for bankruptcy will affect their credit. But many people wonder about the specifics: how long Chapter 13 bankruptcy lasts, how it works, and how specifically it’s likely to affect a filer’s credit.
Here’s a look at all those issues.
Bankruptcy Court Process and Duration for Chapter 13
Chapter 13 bankruptcy cases generally last between three and five years. That’s because Chapter 13 requires filers to make regular monthly payments to creditors to repay a portion of their debts. In court, a Chapter 13 case generally proceeds like this:
- Credit counseling session: Filers have a 180-day window before filing their Chapter 13 cases in which to complete a credit counseling session. Without proof of completion, the bankruptcy court will not accept a filer’s case.
- Petition submission: When a filer submits a bankruptcy petition with the court, the case officially begins. At this time, the automatic stay takes effect and prevents a filer’s creditors from taking any collection action against the filer. The automatic stay remains effective for the duration of the bankruptcy case or until it is lifted by the court.
- Submission of schedules and repayment plan: Within 15 days of submitting their petition, filers must provide schedules that outline their income, expenses, assets, and debts. Chapter 13 filers must also submit their repayment plan, which they must follow for the next three to five years.
- First payment: 30 days after filing a bankruptcy petition, filers must make their first payment according to the plan; filers who miss this deadline may have their case dismissed.
- Creditors meeting: 45 days after submitting the petition, filers must appear in court to testify that the information in their forms is complete and accurate. Creditors are invited to attend this meeting as well, but many do not.
- Financial management course: In order to be eligible for a bankruptcy discharge, all filers must complete a financial management (or “debtor education”) course. This course is designed to teach skills filers will need to manage money and debt after bankruptcy.
- Bankruptcy discharge: Three to five years after filing their bankruptcy petition, Chapter 13 filers who meet all the court’s requirements may receive a bankruptcy discharge. This discharge officially ends the case and may eliminate any remaining unsecured debts.
Chapter 13 bankruptcy remains on a credit report for seven years, counting from the filing date.
While bankruptcy does have an initially negative impact on a filer’s credit, it may not do as much damage as some sensationalized news stories suggest.
Here’s a look at how credit scores are calculated and how Chapter 13 bankruptcy affects them.
How Credit Scores Are Calculated
The Fair Isaac Corporation (FICO) is the organization behind the most commonly used credit score in the U.S.
Nobody outside the company knows the exact formula for a FICO credit score; however, the basics are public knowledge.
A credit score is impacted by:
- Payment history (35 percent): On-time, consistent payments help improve a credit score. Defaults and missed payments harm it.
- Debt-to-credit ratio (30 percent): For a higher credit score, it’s essential to use less than all of one’s available credit. Maxing out credit cards has a negative impact on credit scores because it suggests a person is living at the edge of her means.
- Age of accounts (15 percent): Older accounts are better, as they demonstrate a person’s ability to handle credit over time.
- Credit inquiries (10 percent): These happen when individuals apply for new lines of credit (e.g. car loans or credit cards). Too many inquiries can hurt a credit score by giving the impression that the person is in serious need of credit.
- Mix of credit types (10 percent): Diversity of credit types (secured, revolving, unsecured, etc.) helps improve a credit score.
Chapter 13’s Potential Effect on a Credit Score
Immediately after filing Chapter 13 bankruptcy, the filer’s credit score will likely suffer. But if filers adhere to their repayment plans, make payments on other bills and generally keep up with their finances, the effect of the bankruptcy will diminish with time.
Chapter 13 bankruptcy stays on a credit report only seven years from the date of filing, whereas Chapter 7 bankruptcy remains on a report for 10.
This means that most Chapter 13 filers will have between two and four years with bankruptcy on their credit report once they receive their bankruptcy discharge.