• 19
  • January
    2012

As our readers have most definitely noticed, this is a bankruptcy blog. And as they may have noticed, we mostly write about two forms of bankruptcy: chapter 7 and chapter 13. We focus on these two ways of filing because they are the most common ways people file for personal bankruptcy. So what is the real difference between the two, and what do the two share in common, and how do they affect one's credit?

Both forms of bankruptcy are intended to relieve borrowers from crippling debt. Bankruptcy protection involves coming up with a plan to shore one's finances up and come up with a new game plan. Bankruptcy protection, it has been argued, plays an important role in keeping the economy functioning smoothly.

The basic difference between chapter 7 and chapter 13 bankruptcy is that the latter is geared toward reorganization and repayment, whereas the former is focused on liquidation.

In chapter 7, the borrower is relieved of most unsecured debts. One thinks of credit cards. One of the downsides of chapter 7 is that bankruptcy filings remain on one's credit report for 10 years after completion. Chapter 7 bankruptcy looks unsightly on a credit report, which is a downside.

Chapter 7 bankruptcy, which involves setting up a court-supervised repayment plan, will also remain on one's credit for 10 years, but it doesn't look quite as bad as chapter 7. Still, the effect on one's actual credit score will be the same.

One of the big challenges coming out of bankruptcy will be obtaining a credit card. In a Chapter 13 case, the trustees administering the case must grant permission for a credit card, and then a lender. Many companies offer credit cards to people with bad credit, so it should be too terribly difficult. Still, one should proceed with some caution, as credit can get folks into trouble if not used wisely. When used carefully, it can help your credit score recover more quickly.

Source: creditcardguide.com, "Bankruptcy Choices: Chapter 7, or Chapter 13," Erica Sandberg, January 12, 2012.