Is Chapter 13 Better for My Credit Than Chapter 7?

Posted By Leonard V. Sominsky, ESQ., PC || 20-Jan-2015

If you have considered filing for bankruptcy, you might be stuck on the question of whether to file under Chapter 7 or Chapter 13. Both forms of bankruptcy have their benefits; not only will you be able to discharge most, if not all, of your unsecured debt, but it would effectively put a halt to creditor harassment and continued collection efforts until the bankruptcy process is over. One factor that may influence this decision, however, is how each chapter will affect your credit score.

As you may know, one of the main setbacks of filing for bankruptcy is that it will take a toll on your credit score. Both Chapter 7 and Chapter 13 bankruptcy will remain on your credit report for the same amount of time—which is usually about ten years—but this does not mean that lenders will look at both chapters the same when deciding on whether or not to issue a loan. In some cases, a creditor might be more willing to lend you money if you have filed for Chapter 13, rather than Chapter 7.

How Bankruptcy Will Affect Your Credit Score

It is important to understand that Chapter 7 and Chapter 13 will have the same effect on your credit score. Both forms of bankruptcy would be visible on your credit report for about ten years; however, creditors may look more favorably on Chapter 13. Why is this? In a Chapter 13 bankruptcy, you will take on the responsibility of repaying a portion of your debt over three to five years. This shows that you have made a good faith effort to repay your creditors despite your financial hardship.

In Chapter 7, certain assets would be liquidated and used to repay your creditors. This process is typically much shorter than Chapter 13, as it only takes about four to six months for your debt to be discharged. This is known as the "fresh start" bankruptcy, since it will wipe out most of your debt—apart from secured debts like student loans or child support arrears. While this is the most viable option for some debtors, it may be more difficult to reestablish your credit or obtain a loan in the future.

Does this mean that I should file for Chapter 13?

Every case is different, which means that there is no one-size-fits-all solution to your financial problems. While some lenders will look more favorably on Chapter 13 bankruptcies, this does not necessarily mean that they all will—which subsequently means that it may not be any easier for you to obtain a loan in the future than if you had filed under Chapter 7. The best thing that you can do is to discuss the specific nature of your debt with a lawyer from Leonard V. Sominsky, ESQ., PC.

Chapter 13 bankruptcy is not right for everyone. It is entirely possible that you would benefit more from Chapter 7 bankruptcy, so you should not be deterred from filing under this chapter just because of the effect that it will have on your credit score. Whether you file under Chapter 7 or Chapter 13, you will still need to take steps to rebuild your credit thereafter. When you set up a free consultation with our firm, we can explain all of your options and help you make an informed decision.

To discuss your options with a bankruptcy attorney in Phoenix, contact Leonard V. Sominsky, ESQ., PC. Your initial consultation is free!

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