Last week I wrote about the ability to access credit while a chapter 13 bankruptcy case
is pending. The short summary of last week’s blog is that there are ways to access secured credit (although the interest rate might be high) while a person is in an active chapter 13 case.
However, as I wrote, it is extremely difficult for a chapter 13 debtor to receive unsecured credit – such as a retail or revolving credit card, or an open line of credit – while the chapter 13 case is pending.
This week, I will write about obtaining credit after the debtor has received his chapter 13.
Your Credit Report after the Chapter 13 Discharge
The recently-discharged chapter 13 debtor is going to want to pay careful attention to his credit report. The debtor’s post-discharge credit report will have a significant influence in lender’s decisions regarding whether to extend credit to the discharged debtor. So being mindful of what is and is not on a credit report, and whether that information is accurate is critically important to the process of improving a credit score after a chapter 13 discharge.
The Federal Fair Credit Reporting Act provides that a debtor’s bankruptcy filing can be noted on a credit report for a specific, time-limited period. The FCRA says that banrkuptcy filings can only be reported for ten years after the date the bankruptcy case is filed.
While the law allows for the reporting of a chapter 13 bankruptcy for ten years, the “industry standard” is that chapter 13 cases will be reported for seven years after filing.
Why? Well, the simple answer is that lenders want to lend money, and by the time people are seven years removed from the date the case was filed, most have sufficiently stabilized financially so that lending money is not a high-risk proposition.
So for the typical chapter 13 debtor who was in a plan for three to five years, the chapter 13 bankruptcy will be noted for reporting purposes for an additional two to four years following discharge. And once the bankruptcy information is off a discharged debtor’s credit report, the impediment to credit that a bankruptcy filing can be is eliminated, and the discharged debtor should be able to access credit based on income and asset ownership – just the same as other people who have not filed a bankruptcy case.
After the reporting period is over, people who have filed a chapter 13 bankruptcy are well-advised to check their credit reports to make sure that the notations in the credit report are accurate. In my day-to-day legal practice, I’ve learned that credit reports do not always accurately reflect a client’s financial history. If there are mistakes in the report, each of the three major credit reporting agencies (Equifax, Experian and Trans Union) have dispute mechanisms that allow people to simply and quickly dispute entries on credit reports. In almost all cases, the dispute process is handled professionally and quickly. A correct credit report, after a chapter 13 discharge, is the biggest help a recently-discharged debtor can have in re-establishing a strong credit score.
The Legacy of Chapter 13 – Behavior Change
Before I look at obtaining credit after a chapter 13 discharge, let’s take a moment to consider a major benefit of filing a chapter 13 bankruptcy case. My clients who see me about filing a chapter 13 bankruptcy are, without exception, feeling as though they have lost control of their finances. And because of the “cure” provisions in chapter 13, clients are typically not just feeling the anxiety that comes with overwhelming debt – many of my chapter 13 clients have fallen into such a deep financial hole that they are facing some existential problems – a mortgage about to go into foreclosure or a car loan so seriously delinquent that repossession is a real possibility.
By definition, chapter 13 is a way to have household budgets make sense again. Budget stability is restored. In order to make a chapter 13 payment plan work, my clients have to take a hard look at their earnings, savings and spending. Since chapter 13 requires that debtors pay their disposable income into a plan, while continuing to pay their reasonable and necessary expenses, my successful chapter 13 clients share two important traits: they budget well and they readjust their sense of what reasonable and necessary expenses are.
Almost all of my chapter 13 clients who are able to pay their plan according to its terms and receive their discharge find that their view of what they should spend their money on changes through the experience of being in a chapter 13. Chapter 13 almost always requires a re-setting of priorities away from the consumption-based economy that dominates our country, to a more modest, and less stressful life. Because of this reordering of financial priorities, many of my chapter 13 clients find that they are much less concerned with their credit score after they receive their discharge than they were prior to filing their case. And that’s a good thing.
Credit Shortly After Discharge
Even the most attitude-transformed chapter 13 debtor will find herself needing credit at some point after she receives her discharge. So what about that period between discharge and the expiration of the bankruptcy notation on a credit report? For most chapter 13 debtors, credit is accessible. The issue in these cases if whether a recently discharged chapter 13 debtor can find a “market rate” interest rate for money that he may want to borrow.
It’s possible that during the “gap” between the day that a chapter 13 debtor receives her discharge to the day that the chapter 13 filing is no longer credit reported, the newly-discharged chapter 13 debtor will receive credit but that debtor will have to pay an enhanced interest rate for the credit received. Factors other than the bankruptcy discharge plays a large role in determining the interest rate charged on credit products – such as the credit applicant’s income, marital status and whether the applicant owns her home or is a renter. But the general rule of thumb is this: once a chapter 13 discharge is entered, the debtor/credit applicant should be able to access both secured loans and unsecured credit. That credit might be more expensive than market-rate depending on how long it’s been since the discharge. The credit is there – the patient applicant will pay a lower interest rate.
