Bankruptcy in offers debtors in North Carolina and other states a legal means to remove certain debts when they see no way of paying them. The most common kind of bankruptcy is Chapter 7, which requires the debtor to sell nonexempt assets. However, getting rid of debt doesn’t immediately improve credit scores as is commonly believed.
Chapter 7 and the impact on credit scores
After the trustee divides the proceeds from asset sales among creditors, the remaining debt gets a discharge. Debtors often choose Chapter 7 since it takes less time, but it commonly impacts credit scores more because the debtor has made no repayments. Lenders are commonly reluctant to let someone with this type of bankruptcy borrow money.
Bankruptcy commonly has a bigger impact on those with good credit scores or those who default on accounts with larger balances. Some debtors with a credit score of 780 or greater may see a drop of about 200 points after discharge. Debtors with credit scores of around 680 could see a drop between 130 and 150 points. In addition, Chapter 7 bankruptcy can remain on credit reports for up to 10 years.
Chapter 13 and credit scores
Chapter 13 is often called a “wage earner’s plan” that allows debtors to slowly repay debts. The court devises a payment plan based on the debtor’s income, and they have three to five years to complete it and get discharged. The court does not require the debtor to sell assets in Chapter 13, but they need to prove steady income.
Filing any type of bankruptcy lowers credit scores, and Chapter 13 remains on the credit report for seven years. The impact on credit scores lessens regardless of bankruptcy type as time passes, and debtors have several options to rebuild their credit scores.
While a debtor can go pro se, courts often dismiss Chapter 7 bankruptcy cases if filers make errors. Getting an attorney to represent them may help lower the risk of dismissal.
