Bankruptcy Loans: Getting A Loan After Bankruptcy
Miranda Crace8-minute read
PUBLISHED: April 21, 2023
A person or business may declare bankruptcy when they’re unable to pay off their outstanding debts, and they’re assisted through a legal proceeding in eliminating or paying off part of what they owe. Bankruptcy should always be a last resort when paying off debt, because it can significantly damage your credit score and stay on your credit report for up to 10 years. This can make it difficult to take out a loan after bankruptcy, especially when personal loans rely largely on your credit score for approval.
Getting a loan post-bankruptcy isn’t impossible, though. Let’s take a look at how you can qualify for a personal loan after bankruptcy, and we’ll also consider some other loan options.
Can You Get A Personal Loan After Bankruptcy?
Yes, you can still qualify for a personal loan after bankruptcy, but you’ll have to accept some unavoidable realities:
- You may have a higher interest rate.
- Your lender may charge higher fees.
Your interest rate will be largely determined by your credit score, which inevitably takes a hit after you’ve filed for bankruptcy. Likewise, a bankruptcy on your credit report tells a lender you’ve failed to repay debt in the past. So, if a lender does approve your loan, they could charge a higher origination fee for it because they deem you as a high-risk borrower.
Lenders who approve a personal loan for those who’ve filed for bankruptcy would also likely charge more in other fees and interest to guarantee a return on their investment, in case the borrower defaults or otherwise fails to pay them back in full.
How Bankruptcy Affects Getting A Loan
Your credit score has a lot to do with whether you’re approved for a loan, as well as your possible interest rate, but other factors can also affect your ability to qualify for financing after bankruptcy. It’s time now to examine these factors in-depth.
Which Type Of Bankruptcy You Filed
Individuals can file one of two types of bankruptcy, each structured differently and different in how they can affect your loan qualifications.
Chapter 7 Bankruptcy
An individual or business can file Chapter 7 bankruptcy, which typically discharges your debt in 6 months or less. However, in order for this to happen, you’re required to sell assets and property – though not a property that may be exempt, like a car – to repay your outstanding debt. Those filing for Chapter 7 also must pass a means test to prove they make less than the median household income in their respective state.
Chapter 13 Bankruptcy
Only individuals may file for bankruptcy under Chapter 13, or “reorganization bankruptcy.” Your debt is reorganized through a court-ordered repayment plan – usually lasting 3 to 5 years – meant to make it easier to manage your debt payments. This plan can allow you to keep your assets and property if you can fully repay your debts in the allotted time, after which your debt is fully discharged.
Whichever bankruptcy you file, you won’t be able to apply for a personal loan until your debt is discharged. If you qualify for Chapter 7, your debt would be discharged in a matter of months, compared to Chapter 13’s repayment plan that stretches multiple years.
The Amount Of Time Since You Filed For Bankruptcy
A bankruptcy can stay on your credit report for up to 10 years after you filed, and it could deter some lenders from approving you for a loan. Whether a lender approves or doesn’t approve you for a loan can also depend on what type of bankruptcy you filed. A Chapter 7 bankruptcy will remain on your credit report for 10 years, but a Chapter 13 may go away after 7 years.
The State Of Your Credit Score
As mentioned earlier, your credit score and credit history have a lot to do with your ability to qualify for a personal loan. A bankruptcy of any kind can significantly lower your credit score, and some lenders may see the bankruptcy and decide you’re too big a risk to approve. If you are approved, you’ll need a credit score of at least 650 to qualify for a good interest rate.
If your credit score is too low to qualify for a good rate, it’s best to take steps to improve your credit before applying for a loan.
The Type Of Loan You Want
The type of personal loan you want, as in secured or unsecured, is an important factor in getting a loan after bankruptcy. Most personal loans are unsecured and don’t require any collateral, meaning your approval leans more heavily on your credit score. If a bankruptcy has lowered your score significantly, you may not qualify for a good interest rate, if a lender approves you at all.
Applying for a secured loan could improve your chances of being approved. That’s because lenders may find a loan secured by collateral less risky, since they’ll be guaranteed repayment of some kind.
Getting A Personal Loan After Bankruptcy
Regardless of whether you’ve ever filed for bankruptcy, you’ll typically follow the same process for getting a personal loan. Here’s a breakdown of the steps in the process:
- Check your credit report. We’ve discussed how much your credit score influences your approval interest rate. Check your credit report first to see if now is the right time to apply.
- Decide your loan amount. Whatever you need the funds for, make sure you’re borrowing all that you need. Most lenders offer $1,000 – $50,000 for a personal loan.
- Shop around and compare lenders. Check out multiple lenders and compare their rates and loan terms against each other to find the best deal.
- Get prequalified and choose a lender. Get prequalified with multiple lenders for the best estimate of the rates and terms you qualify for without affecting your credit score. Once you’ve found the best offer, choose your lender.
- Submit a full application. Fill out a full application and submit it. This may involve a hard inquiry, which will lower your credit score slightly.
- Wait for an approval and receive your funds. Approval and dispersal on a personal loan can take a few business days. Shortly after you’re approved, your funds will show up in your bank account. Rocket Loans℠ can offer same-day financing under special circumstances.*
Personal Loan Alternatives After Bankruptcy
Depending on your situation, an unsecured personal loan may not be the right choice for you after bankruptcy. Next up are some loan options that may suit you better.
Secured Personal Loans
Some lenders offer secured personal loans, and, as discussed above, loans secured by collateral have a better chance of being approved if your credit isn’t so impressive. If you’re approved, there’s still the possibility that you won’t be able to keep up with your monthly payments and your lender will seize your property or another asset that’s securing the loan.
Rocket Loans doesn’t currently offer secured personal loans.
Home Equity Loans Or HELOCs
Home equity loans can be used in a fashion similar to personal loans, and they’re secured by the equity in your home. As with other secured loans, you’ll likely qualify for a better interest rate on a home equity loan than you would with an unsecured personal loan. This time, though, it’s your home you stand to lose if you default on the loan.
A home equity line of credit, or HELOC, is a revolving credit line in the same vein as a home equity loan with regard to what serves as collateral. However, a HELOC features a withdrawal and repayment period that a home equity loan doesn’t, and these terms are detailed in your lender approval. As with a home equity loan, your home equity secured the money you can now access and your lender can seize your home if you fail to repay your balance.
Secured Credit Cards
When getting a credit card, your approved credit limit is determined by your credit score. Since your credit may be damaged after a bankruptcy, you may want to look into getting a secured credit card.
Instead of being secured by property or assets like a house or car, this type of credit card is secured by a deposit that will equal your approved credit limit. For example, if you make a $300 security deposit, your credit card will have a limit of $300. If you repay your full balance or upgrade to an unsecured card, you’ll get your full deposit back. If you default, however, your card issuer will claim the amount you put down.
Another loan option for those with a low credit score is having a co-signer on their loan application. A co-signer is most often a close friend or relative who has good credit and agrees to be held responsible for the loan if you as the primary borrower default or miss payments. Any missed payments will affect the credit score of both parties.
Rocket Loans doesn’t currently offer co-signed loans.
Loans To Avoid After Bankruptcy
Plenty of predatory lending practices out there aim to take advantage of borrowers in need of cash. Though your credit could stand a boost, you should avoid the following no-credit-check loans, at all costs.
- Payday loans: Payday loans offer fast funding with repayment due by the date of your next paycheck, which is typically 1 – 2 weeks out. The annual percentage rate (APR) for these loans is around 400%, and lenders charge lending and rollover fees that can put you in worse financial standing than you were in when you sought out the loan.
- Title loans: Similar to payday loans, title loans don’t require a credit check but do require collateral – typically a vehicle. APR on title loans runs about 300%, and you could lose your vehicle if you don’t pay by a certain date.
FAQs About Bankruptcy Loans
Getting a loan after bankruptcy can seem complicated. Here are some frequently asked questions concerning this topic.
Can I get a personal loan after bankruptcy?
Qualifying for a loan after bankruptcy can be difficult because of how bankruptcy affects your credit score. Having a bankruptcy on your credit report can likewise deter some lenders from approving you for any amount. Getting a loan is still possible, though, even if your interest rate is higher because of your bankruptcy.
How long do I have to wait to get a personal loan after bankruptcy?
This can depend on what type of bankruptcy you filed, because you can’t take out a loan until your outstanding debt is discharged. A Chapter 7 bankruptcy takes up to 6 months to discharge your debt, whereas a Chapter 13 repayment plan can last up to 5 years.
For the best chance of receiving a loan after a bankruptcy, maybe consider waiting until the bankruptcy is removed from your credit report. This can take 7 – 10 years, depending on whether you filed Chapter 7 or 13.
Are there banks that work with bankruptcies for personal loans?
Traditional banks, credit unions and private lenders all have different standards for approving people for a personal loan after they’ve filed for bankruptcy, but it doesn’t hurt to look around or talk with your personal financial institution about how they treat these situations. Lending institutions with lower credit score requirements could be your best bet for getting approved after bankruptcy.
Filing for bankruptcy can cause great damage to your credit score, making it difficult to get approved for a personal loan at a later date. Some lenders may approve those with a low credit score but charge them a higher interest rate. You also might decide to seek out alternative loan options or wait until you’ve repaired your credit or your bankruptcy is removed from your credit report. Whatever approach you choose, just make sure it’s the right one for your situation.
For an estimate of your personal loan qualifying rates and terms, start the process today with Rocket Loans.
*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
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