Chapter 13 Bankruptcy Laws and Credit Bureaus

Chapter 13 can be much worse on your credit. 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 but hey 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. 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.

The credit bureaus did this because of a case that a Wisconsin Bankruptcy judges ruling in 2008. So far, even with a court decision in 2008 and new credit reporting rules in 2009, about half the creditors are not doing what they are supposed to do.

I saw that one the credit report of one of my clients, Sara. (Not her real name.) Sara had to file a chapter 13 to catch up the mortgage on her home. When things at her job got slow, Sara got behind, and she needed Chapter 13 to give her time to catch up. Two years into her five year Chapter 13 plan, Sara’s car broke down. 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. Sara 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, First Premier, and HSBC. If all Sara 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. Call each of the big three credit bureaus and order your report to see if the companies are following the new chapter 13 bankruptcy laws and reporting the correct information.