Understanding Bankruptcy and Which Chapter is Better for Credit Score

woman sitting at table working on finances


By:Mike Cibik

Let’s be honest. No one wants to declare bankruptcy of any kind, whether it’s a Chapter 7 or 13. We try to control our finances, but life happens. When the only solution is bankruptcy, it’s important that you understand bankruptcy, including how it affects your credit report.

In the past 20 years, filing for bankruptcy has become as common as applying for a loan. No matter the reason, going through a bankruptcy is hard, but it will not destroy your credit report. Yes, it will be a black mark on it, but the depth of the mark differs among the bankruptcies. They both have the same effect, so it comes down the creditor reviewing your credit report, and the time it takes to rebuild your credit.


Chapter 7 Bankruptcy: A Faster Way to Build Credit

Chapter 7 and Chapter 13 differ in time and money. A Chapter 7 bankruptcy has a quicker process and doesn’t involve repayment. Some wonder if it’s better to choose a Chapter 13 bankruptcy because they are making an effort to pay back their creditors. Again, it depends on who is reviewing your credit report. But, many banks look favorably on Chapter 7 because these debtors do not have put all their disposable income toward the payment plan of Chapter 13.

The filing process for a Chapter 7 is less than six months, as opposed to three to five years for a Chapter 13. This way, those who filed for Chapter 7 can rebuild their credit faster and get on a better financial track with credit cards designed for those who just obtained a discharge.

Keep in mind, these credit cards come with a high-interest rate, but after some time, you will be able to get a credit card with a lower interest rate. Your credit score will increase a year post-discharge, so you’ll be able to apply for loans (car and home). Also, a Chapter 7 is cheaper than a Chapter 13 not only with the bankruptcy attorney fee but there is nothing to pay back.


Keeping your Assets with Chapter 13 Bankruptcy

With a Chapter 13 bankruptcy, you still retain your assets. This may be appealing to a creditor. Also, this type of bankruptcy stays on your credit report for 7 years (from the date it’s filed), whereas a Chapter 7 will stay on your credit report for 10 years. Also, some banks may look favorably on you since you are making an effort to pay off your debts with a payment plan.


Bankruptcy & Credit Reports

When something involves bankruptcy, Chapter 7 or Chapter 13 bankruptcies tend to leave people worrying about their future – their credit report/score. The FICO credit score determines the type of loans you can get and credit cards post-bankruptcy. It’s important to note that your FICO credit score is based on a scoring model (formula). There are 28 popular FICO scoring models, each one based on the type of loan. Thus, the faster you can build up your credit score, the faster you can put the bankruptcy past you.


The Bankruptcy Experts in Philadelphia

At Cibik & Cataldo, we specialize in bankruptcies, particularly Chapter 7 and Chapter 13. We will review your financial situation to determine which type bankruptcy is right for you. We know the latest changes to bankruptcy law to help your case be processed quickly and smoothly. Bankruptcy is not a black-and-white situation; there are many gray areas. We will help you understand the gray areas and more to help you will feel confident about your decision to file and to hire us. Call or email us today for a free consultation!


Bankruptcy Law Awards/Associations

We are a debt relief agency that helps people
seek bankruptcy protection under federal law