Chapter 13 Bankruptcy and Improving Credit
Filing a Chapter 13 Reorganization Plan
Simply put, a Chapter 13 is a court authorized repayment plan with your creditors. It is your best efforts over a 36 – 60 month time period to pay towards your debts with reasonable terms. Whatever balance of unsecured debt that is unpaid at the end of this debt consolidation process is eliminated. This repayment process is designed to help you improve your credit throughout the course of the program.
How will filing a Chapter 13 impact my credit?
Chapter 13 is debt management program designed to improve credit over the course of the 36- 60 process. There are 2 main functions of credit and this is how the Chapter 13 bankruptcy process addresses each:
- Debt-to-Income Ratio or Leverage: This accounts for the percentage of your monthly gross monthly income that goes towards paying debt. Your credit is negatively impacted if you are over-leveraged. This means that too much of your income is going towards paying off debts rather than paying your normal living expenses.
The Chapter 13 process reduces your debt-to-income ratio each month that you are paying into the established repayment plan. Since all unsecured debts and arrearages are paid back at 0% interest, your monthly payments reduce principal balances versus just servicing the debt.
As your debt-to-income ratio improves throughout the course of the Chapter 13, so also will your credit score.
- Consistent and timely payments to creditors: Juggling bills at the end of each month may mean a late or missed payment to some of your creditors. The Chapter 13 resolves this issue by creating an orderly repayment for all of your creditors. The Chapter 13 prioritizes your income in the following way:
- Payments on secured debts and back-payments on secured debts (first mortgage, vehicle payment, etc.)
- Your monthly living expenses (groceries, gas, utilities, etc.)
- Payments towards any priority debts such as income tax debts
- Whatever funds are left over (if any) after the above deductions, are paid towards your pool of unsecured creditors, such as credit cards, medical bills, etc.
Most often, the unsecured creditors are paid back at a reduced rate. At the end of the program, any remaining balances are eliminated or discharged.
While you are under the court protection of a Chapter 13 personal bankruptcy, there is no more “late” reports to the credit agencies. Based on your payment into the plan, a court-appointed Trustee makes consistent monthly payments to your creditors based on the above described hierarchy. This restores and ensures timely payments to your creditors.
Discuss Your Credit and Debt with a Qualified Bankruptcy Attorney.
One of our experienced bankruptcy lawyers will review your current credit, outstanding debt obligations and future financial goals and then provide an in-depth analysis of recommended next steps. We are here to answer your questions and provide expert legal advice.
We offer free in-office or phone consultations to review your personal circumstances, analyze your situation and advise you on the best course of action. We specialize in bankruptcy law, debt resolution, foreclosure prevention and credit repair. We have offices in
