There are two types of Bankruptcy that we see on a member's credit report: Chapter 7 and Chapter 13. There are important differences between these two!

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Chapter 7 Bankruptcy is generally more of a liquidation/debt discharge bankruptcy. The borrower is asking the court to discharge eligible debts rather than working through a repayment plan. From a lending perspective, this is typically viewed as a higher-risk bankruptcy event because the borrower did not repay through a structured plan and there are losses to creditors. 

 

Chapter 13 Bankruptcy is different in that it is a repayment plan through the court/trustee, usually over a three- to five-year period. The borrower is making payments according to an approved plan and, if they complete that plan, the bankruptcy can be discharged. The U.S. Courts describe Chapter 13 as a “wage earner’s plan” that allows individuals with regular income to repay all or part of their debts over time.

 

The key distinction for Connections is whether the Chapter 13 was discharged or dismissed.

 

A discharged Chapter 13 means the borrower successfully completed the court/trustee repayment plan and the bankruptcy was completed. In that situation, we do not want to penalize the borrower the same way we would if they had walked away from the plan or had a Chapter 7 debt discharge. Therefore, we will not require the 2% add if a Chapter 13 is discharged. We will, still require a Loan Review if the discharge date is within the last 3 years of the current loan application.

 

A dismissed Chapter 13 is very different. Dismissed means the bankruptcy case ended without successful completion of the plan and without the same final discharge. That is a much bigger concern from a lending standpoint because it may indicate the borrower did not follow through with the trustee’s plan, may still be in financial hardship, and could still pursue other bankruptcy options, including Chapter 7. A bankruptcy discharge generally releases the debtor from personal liability for certain debts, while a dismissal does not provide that same completed fresh-start result.

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How to proceed when a bankruptcy appears on a credit report:

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Open Chapter 13 (only shows as filed):
Do not do any new loans while the Chapter 13 is still open, unless there is a very specific reason and appropriate approval/legal guidance through Stephanie.  The Trustee would also have to agree to any new debts.  We also have to be very careful because the new debt taken out during the BK could get involved in the open BK. 

 

Dismissed Chapter 13:

If the Chapter 13 was dismissed, that is a negative factor. It means the borrower did not complete the plan, and we should treat it with more caution. We should proceed with EXTREME caution due to them still being in a hardship, as these typically convert to a Chapter 7.

• Yes, Add 2% to the rate

• Yes, Loan Review if the dismissed date is within the last 3 years.

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Discharged Chapter 13:
If the borrower completed the Chapter 13 plan and it was discharged, we can give them credit for successfully following through with the repayment plan. 

• Do not add 2% to the rate

• Yes, still do a Loan Review if the discharge date was within the last 3 years.

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Discharged Chapter 7:

With a Chapter 7, we should only proceed with the loan if there is a discharge date or if the member has proof of the Bankruptcy being discharged.

• Yes, add 2% to the rate

• Yes, do a Loan Review if the discharge date was within the last 3 years.