Chapter 13 bankruptcy is designed for debtors who want to repay their debts, but just need a bit of breathing room. During the Chapter 13 bankruptcy process, debtors are prohibited from applying for new credit cards without the court's approval. Once your Chapter 13 case is discharged, you can begin applying for new loans or credit cards, although it may initially be difficult to get approved.
How Chapter 13 Works
When you file Chapter 13 bankruptcy, you agree to repay your debts over a period of three or five years. The length of your repayment period is based on your income and state median income limits. If your income exceeds the limit allowed in your state for your family size, your repayment period will last five years. If it's less than the state limit, you only have to pay for three years. Any priority debts, such as child support or back taxes must be repaid first and in full, followed by any secured debts, including mortgage or car loans. Unsecured debts, such as credit cards, receive lowest priority for repayment. You can't get a discharge of your bankruptcy until all of your plan payments have been made.
Chapter 13 and Your Credit
A Chapter 13 bankruptcy filing can remain on your credit history for up to seven years. Typically, filing bankruptcy can cause your credit score to drop anywhere from 100 to 200 points. If you and your spouse file Chapter 13 jointly, you can expect both of your credit ratings to be affected. The better your credit was before you filed, the less damaging the bankruptcy will be. In most cases, it can take anywhere from six months to two years after the filing for you to begin to see an improvement in your credit score.
Rebuilding Credit After Bankruptcy
Following the completion of your Chapter 13 case, you may initially find it difficult to get approved for credit cards or other lines of credit. One way to begin reestablishing your credit is to apply for a secured credit card. This type of card requires you to deposit cash collateral with the card issuer, which then serves as your credit line. The key to improving your credit score is to pay off your balance in full each month and make your payments on time. Once you establish a solid payment history, the card issuer may convert you to an unsecured card.
Avoid applying for multiple credit cards immediately after your Chapter 13 bankruptcy is discharged. A percentage of your credit score is based on the number of inquiries for new credit you have and multiple applications can actually cause your score to go down even more. Read the fine print for any credit card offers you receive or before applying for new credit. While there are companies that are willing to issue credit to debtors who are fresh out of bankruptcy, these cards often come at premium in terms of annual fees and high interest rates.
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