How to Boost Credit Score While In Chapter 13

A Chapter 13 Bankruptcy is a court authorized repayment plan with your creditors. You provide your best efforts over a 36 – 60 month time period to pay towards your debts with optimal repayment terms, such as 0% interest on unsecured debts.

This repayment process is designed to help you improve your credit throughout the course of the program and is how to boost credit score while in a Chapter 13. 

Steps for Improving your Credit Score

1. Improve your Debt-to-Income Ratio or Leverage (Accounts for 30% of your Credit Score):

This accounts for the percentage of your monthly gross monthly income that goes towards paying debt each month.  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 Bankruptcy 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 plan payments reduce principal balances versus just servicing the interest on the debt. The Chapter 13 repayment plan provides a balanced budget framework to pay down debt and consistently reduce your debt-to-income ratio. 

Since your debt-to-income ratio accounts for 30% of your credit score according to FICO, improving it could have a dramatic impact on your score. As your debt-to-income ratio improves throughout the course of the Chapter 13, so also will your credit score.

2. Provide Consistent and Timely Payments to Creditors (Accounts for 35% of your Credit Score):

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 or arrearages on secured debts (first mortgage, vehicle payment, arrearages, 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 Chapter 13 Trustee makes consistent monthly payments to your creditors based on the above described hierarchy.  This restores and ensures timely payments to your creditors. According to FICO, your recent payment history has the biggest impact on your credit score, comprising 35% of your credit score.

Based on an improved debt-to-income ratio and restored timely payments to creditors, 65% of your credit score factors are improved through filing Chapter 13 bankruptcy.

Experienced Chapter 13 Attorneys in Michigan

Our firm was established to do one thing: help our clients find lasting debt resolution and restored credit.

Calling us may be your first step towards finding financial freedom and peace of mind. At the free consultation, one of our experienced Chapter 13 lawyers will review your current credit, outstanding debt obligations and future financial goals to provide you with an in-depth analysis and recommended next steps.