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  • Robert Weed

Chapter 13 bankruptcy and your credit report

Virginia bankruptcy lawyer Robert Weed

I don’t like Chapter 13 bankruptcy. One reason is this. Your credit so much much worse than if you filed a Chapter 7 bankruptcy.

I don’t like Chapter 13 bankruptcy.  One reason is chapter 13 is much worse on your credit.

Since you are paying your creditors, at least a little, in Chapter 13, that’s unfair. Five years after filing a Chapter 7 bankruptcy, people can have great credit. (Assuming life hasn’t knocked you down again.) You can get a car loan at as good a good rate. You could already be a year or two in your new home.

After five years of Chapter 13 bankruptcy, your credit will still stink. Why is that? About half the companies you owe money to, will have given you five more years of bad credit.

They are not allowed to do that.  They do it anyway.

For years, the credit bureaus had no rules on how chapter 13 should show on your credit. But they corrected that, finally, in December 2009. (That was eighteen months ago.)

In December 2009 the credit bureaus told the credit card companies, and other creditors, what to do when a Chapter 13 plan is approved.

They said that once the Chapter 13 plan is confirmed, creditors can’t keep reporting you as past due. And they have to reduce the balance on your credit report down to what the judge said you had to pay.

Why did the credit bureaus finally set rules on this? Maybe because back to 2008, Wisconsin Bankruptcy Judge Susan Kelley said the same thing, in a case brought by bankruptcy lawyer Christine Wolk.

So far, even with a court decision in 2008 and new credit reporting rules in 2009, about half the creditor are not doing what they are supposed to do.

I saw that one the credit report of one of my clients, Jane. (Not her real name.) Jane had to file a chapter 13 to catch up the mortgage on her mom’s home. (Mom lives in a small place that Jane financed for her. Mom doesn’t have much retirement, so Jane has to help out. when things at her job got slow, Jane got behind, and she needed Chapter 13 to give her time to catch up.)

Two years into her five year Chapter 13 plan, Jane’s car caught on fire. Scary. She still needed to get to work, so she asked the bankruptcy Judge for permission to borrow money to buy a used car. The Judge was glad to give her permission to borrow $5000 to buy a used car. But when she went to get a car, 25% interest was the best she could do. No choice, she paid it.

What was the problem with her credit report? Apple Federal Credit Union, Capital One, and Capital One Auto had reported her as late every month since she filed Chapter 13 bankruptcy in June 2009. When she bought a car in May 2011, she had two years of being late every month with them.

Chase, HSBC and Dell stopped reporting in June 2009–the same way they would have in a Chapter 7. So her last reported late payment on those three accounts was two years old when she went to buy the car.

Jane had done what she should do to get back to good credit. She had three new, current credit cards in good standing–paid in full every month, never late. Capital One (ironically), First Premier, and HSBC.

If all Jane had was three current credit cards, two years after a chapter 7 bankruptcy, she’d have probably been below 10%. That difference, on a $5000 car loan, is $1885.

I’m fighting in court to get her that $1885 back from those three companies.

Are you in Chapter 13 now? Don’t wait until your bankruptcy case is over to do something about your credit report.

Call each of the big three credit bureaus and order your report. My instructions on how to do that are here.

Then, talk to your bankruptcy lawyer about how to fight this issue in your state. You can dispute it with the credit bureaus under the Fair Credit Reporting Act, and then sue the bureaus and the creditors if they don’t fix it.  (Do you need a credit report lawyer in your state?  You can find one at NACA.)

Or you can bring it in front of your bankruptcy judge.  Ask the judge to follow what Judge Kelley said. (Some bankruptcy judges aren’t very friendly to consumers, so make sure your lawyer is comfortable with your judge.)

If I’m your lawyer, email the credit reports to my Chapter 13 credit report paralegal,  Brenda will work with you on the steps we take to get it fixed.

It’s three years after Judge Kelley’s decision; eighteen months after the new rules set by the credit bureaus. It’s time to get those companies to do what they are supposed to do.

PS:  I’ve fought this and lost

I’ve given up on this issue. I fought it with two different judges here in Northern Virginia and I’m 0 for 2. I hope someone will have better luck somewhere and when they do, I’ll see if I can try again.   

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