Anyone filing for Bankruptcy is in financial pain, and the need to rehabilitate financially, to return to a viable financial life, is the ultimate goal. How best to accomplish this specific rehabilitation goal, though? Many of our clients come in with the preconceived notion that paying something back to their creditors, or ‘doing the right thing’, or ‘being responsible’ will result in some sort of credit or gold star, on the way to financial well being.
Well, maybe that’s the way it should be. The reality is quite different.
Which Type of Bankruptcy Will Rebuild My Credit Faster?
So, which type of bankruptcy should a client file to maximize the return to a good credit score? There are two basic types of consumer bankruptcy. Chapter 7, where generally, creditors are not paid back, and Chapter 13, where generally, creditors are paid back something. Most mistakenly believe that by choosing Chapter 13 repayment Plan, they will satisfy some unstated prerequisite for a better credit score, in the future. This is not the test.
The Discharge is the Most Important Step Towards Obtaining Your Fresh Start
The test for new credit is obtaining a successful Discharge of your debts, and a closing of the case. The discharge order can be from a Chapter 7 ‘straight’ bankruptcy, or from a Chapter 13 ‘repayment’ bankruptcy. The kind of bankruptcy doesn’t matter. The bankruptcy discharge order is the key document to help rebuild your credit because it demonstrates to creditors that you are ready to take on new debt once again. Your old debt has been wiped away and you’re now ready for new credit in small increments. Until the discharge comes into play, you’re still hampered by all of your old debts.
When Will I Receive My Discharge?
In a Chapter 7 case, the ‘normal’ time frame for obtaining a discharge is approximately 4 months. In Chapter 13, the ‘normal’ time frame for obtaining a discharge can be up to 3 years, and even extending to 5 years. So, in this narrow analysis, a Chapter 7 discharge ‘wins’ over a Chapter 13 discharge, solely because the Chapter 7 discharge is usually issued much faster. True, there are many other variables to consider before one embarks upon Chapter 7 or Chapter 13, and one must counsel with a competent attorney to analyze those variables, but specifically, for a better credit score, get a discharge order as quickly as you can.
Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.