Getting Loans After Bankruptcy: Can it be Done?

Getting Loans After Bankruptcy: Can it be Done?

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While not commonly known to many borrowers, it is possible to obtain loans after bankruptcy. However, this may be difficult and comes with caveats, as bankruptcy often devastates a person’s credit score. As a result, people with bad credit scores often have a hard time securing the financing they need. However, though difficult, post-bankruptcy loans are not impossible to obtain. Here’s what you need to know going forward.

How long bankruptcy impacts your credit

Bankruptcy is often a last resort for individuals or organizations that can no longer keep up with their debts. How long bankruptcy pulls down your credit depends on what type of bankruptcy you filed. Here’s the different types of bankruptcy and what to expect:

  • Chapter 13: Bankruptcy will stay on your credit report for seven years in the case of Chapter 13 bankruptcy. With this type of bankruptcy, you’ll be able to avoid foreclosure on your property by following a payment plan instituted by the courts. This can take the form of bank account garnishment. Your credit will still be severely impacted, but you may be able to avoid other negative impacts such as losing your home or vehicles.
  • Chapter 7: This type of bankruptcy is centered around liquidation. If you aren’t able to afford your bills or monthly payments to clear your debt, Chapter 7 may be the path forward for you. With this approach, while you won’t have to make payments, your property and assets may be seized. Your ability to obtain loans after Chapter 7 bankruptcy may take longer as it can take 10 years for Chapter 7 bankruptcy to come off your credit report. In the meantime, your credit score will take a heavy toll.

Can you get unsecured loans after bankruptcy?

It is technically possible to get unsecured loans after bankruptcy, but you usually have to wait a bit for your bankruptcy to age and your credit score to improve before you can get approved for a loan with reasonable terms. There may be lenders willing to give you loans almost immediately if you’re willing to pay high interest rates and fees. However, this could easily send you back on the road to bankruptcy.

  • After completing a Chapter 7 bankruptcy, your debts will be wiped so you won’t have any debt payments to make. This could free up enough money in your monthly budget to allow you to take out a small loan.
  • Chapter 13 bankruptcy restructures your debt into a manageable form which you will need to work to repay, over three to five years in most cases. Chapter 13 bankruptcy means you may not have any available income to dedicate toward a new loan until the bankruptcy payments are completed.

Either way, the key to getting an unsecured loan after bankruptcy is repairing your credit score and showing you can make on-time payments after the bankruptcy. While you may be able to get an unsecured personal loan immediately with a reasonable credit score, you will likely need to improve your credit score a bit before applying for an unsecured loan if you’ve recently been through the bankruptcy process. And in most cases, you will need to wait until the bankruptcy is discharged by the court.

Taking out a small secured loan or secured credit card and making all of your payments on time can prove you’ve changed your ways. After about a year or two of consecutive on-time payments, lenders may be willing to work with you, despite the bankruptcy, if you have enough income for the loan.

How to get unsecured loans after bankruptcy

Getting approved for an unsecured personal loan after bankruptcy may take some time, but it is possible in certain situations if you’re prepared to put in the effort.

  • The first thing you need to do is review each of your credit reports from Experian, Equifax and TransUnion to make sure everything is correct. Verify that every debt involved in your bankruptcy has been properly updated to reflect its correct status. If you find any negative errors on your credit report, get them resolved prior to applying for an unsecured personal loan.
  • If you have some time before you need a loan, we recommend that you take steps to build your credit. The simplest approach is to make on-time payments on all of your bills. Late or incomplete payments can be reported to the credit agencies which can set your score back significantly. Additionally, you’ll want to minimize your use of any existing credit lines that you have, as higher rates of credit usage can negatively impact your score. Generally speaking, the best way to improve your score is by staying out of trouble with creditors. Gradually and over time, your credit score should improve.
  • Pull together the documentation necessary to apply for an unsecured personal loan. In addition to the usual information needed to apply for a personal loan, you’ll need to pay special attention to your income and any factors you could use to convince a lender to loan you money.
  • When it comes to your income, make sure you include all of your income sources, since lenders will want to verify your ability to repay the loan. You’ll also want to convince the lender you’ve changed your financial habits. You can show how you’ve made on-time payments on secured debt and even show how you’ve successfully saved money since your bankruptcy. While some lenders may not take this extra information into consideration, it never hurts to make your case if you’re working directly with a lender.

When you're ready to apply, most lenders will request the following items:

  • Identification
  • Proof of address
  • Income verification
  • Employment verification
  • Desired loan amount
  • Desired loan use
  • Desired loan term

While some lenders may automatically deny a loan application that includes a bankruptcy, there are other lenders that specifically work with people that have bankruptcies on their credit reports. But remember: just because a lender considers applicants with bankruptcies does not mean you’ll automatically be approved for a loan.

You may have a better shot at getting approved if you apply in person at a credit union or community bank where you’ve had a banking relationship for years, as local lending institutions may be more flexible than a larger bank might be.

If a local credit union or community bank isn’t an option, click here for a summary of lenders that specialize in consumers with below average credit. Keep in mind, these lenders may charge very high APRs to offset the fact you have a bankruptcy on your credit report.

What to do if you're rejected for a loan

You still have options to borrow money even if you can’t find a lender willing to approve your application for an unsecured personal loan.

  • Cosign: Adding a cosigner with better credit can often improve your chances of getting approved for an unsecured personal loan. However, not all lenders allow for cosigners, so be sure to do your research and check with a potential lender first.
  • Secured loan: Look into secured loan options that require a savings account or auto equity as collateral. However, the lender may seize the collateral if you fail to repay your loan.
  • Credit builder loan: Another option you could consider is a credit builder loan. Credit builder loans are often secured by the proceeds of the loan itself. Simply make your payments on time, and at the end of the loan you’ll have an improved payment history and you’ll have saved up the amount of the loan. Credit builder loans usually charge interest and other fees, so you’re essentially paying to rebuild your credit score.
  • Secured credit card: Consider obtaining a secured credit card to help rebuild your credit. Secured credit cards require a security deposit that is typically equal to your credit limit. If you responsibly make charges on your credit card, wait for a statement to generate and pay your balance off in full before the due date, you won’t get charged interest on your purchases and you’ll begin rebuilding your credit history, so you can work toward eventually getting approved for an unsecured personal loan.

Life after bankruptcy

Before filing for bankruptcy, evaluate and exhaust all your options, such as debt consolidation, borrowing from family or friends or credit card debt settlement. But, if you find yourself in the position of having to declare bankruptcy, there’s still a light at the end of the tunnel. Yes, bankruptcy can be devastating to your life and credit, but, like many things, it’s not forever.

While most lenders prefer borrowers with a solid credit score and clean history, there are credit card companies and personal loan lenders that work with chapter 13 and chapter 7 bankruptcy borrowers. However, to avoid further financial stress, be sure to analyze whether you’re able to afford loans after bankruptcy before signing on for a new loan.

Kenny Zhu contributed to this report.