Personal loans come with a lot of responsibility, but they can be an invaluable tool in a financial pinch. But can you get a personal loan after bankruptcy? Possibly, but you can certainly expect to pay a higher interest rate. Your eligibility depends on the type of bankruptcy you filed, how long ago you filed and your credit score.
Declaring bankruptcy can provide much-needed financial relief when you’re facing insurmountable debt. However, it also damages your credit and makes getting approved for new loans more challenging. In this article, we’ll explain how personal bankruptcy works, how it impacts your credit, and what you can do to boost your chances of qualifying for a personal loan after bankruptcy.
An Overview of Personal Bankruptcy
There are two main types of personal bankruptcy filings – Chapter 7 and Chapter 13
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, discharges many types of unsecured debt like credit cards, personal loans, and medical bills. Any non-exempt assets you own may be sold by the bankruptcy trustee to pay back creditors. Exempt assets include certain property like a vehicle, work tools, and basic household items.
The whole Chapter 7 process typically takes 4-6 months. Once your debts are discharged, you are no longer legally required to pay them back. However, the bankruptcy remains on your credit report for 10 years.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy sets up a 3-5 year repayment plan for your debts Rather than wiping debts out completely, you agree to pay back a portion of what you owe This allows you to keep assets like your home in some cases.
Chapter 13 bankruptcy stays on your credit report for 7 years. Debts eligible for discharge may be removed earlier if you complete the repayment plan.
How Bankruptcy Impacts Your Credit
Personal bankruptcy causes significant damage to your credit that can make getting approved for loans very difficult. Here’s an overview of the major credit impacts:
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Bankruptcy on Credit Report Chapter 7 bankruptcies stay on your report for 10 years, Chapter 13 bankruptcies remain for 7 years
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Lower Credit Scores: Declaring bankruptcy can drastically lower your credit scores into the “very poor” range (under 580 FICO). Some scoring models may limit your scores to a range of 300-800 after bankruptcy.
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Difficulty Getting Approved: Lenders view bankruptcy filers as very high-risk. You may not meet minimum credit score requirements for approval.
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Higher Interest Rates: If approved after bankruptcy, expect to pay much higher interest rates due to your poor credit scores.
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Limited Types of Credit: You may need to start rebuilding credit with secured cards or credit builder loans designed for bad credit borrowers.
Tips for Getting a Personal Loan After Bankruptcy
Although challenging, getting approved for a personal loan after bankruptcy is possible in many cases. Here are some tips that can increase your chances:
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Wait if Possible: Allow time to rebuild your credit first. Many lenders require at least 1-2 years of reestablished credit after bankruptcy to qualify.
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Shop With Subprime Lenders: Online lenders, credit unions, and community banks may offer personal loans to borrowers with recent bankruptcies and poor credit.
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Consider a Secured Loan: Secured loans require collateral but are easier to get after bankruptcy. Only risk assets you can afford to lose.
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Have a Co-signer: Asking a friend or relative with good credit to co-sign will make approval more likely and potentially lower your interest rate.
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Only Borrow What You Need: Don’t take out a bigger loan than necessary. Keep the loan term short to pay it off quickly.
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Make Payments on Time: Stay current on all credit accounts and loans to gradually rebuild your credit history.
Dangers of High-Interest Loans
When you need cash after bankruptcy, “guaranteed approval” loans with sky-high rates may seem tempting. However, these should be avoided because they often create debt traps. Common high-cost lending offers include:
- Payday loans
- Car title loans
- Pawn shop loans
- Loans from loan sharks/illegal lenders
While easy to obtain, these loans come with APRs starting at 200% or higher. Unaffordable payments, rollover fees, and aggressive collections practices are common. Relying on these to make ends meet will likely worsen your financial situation.
Rebuilding Credit After Bankruptcy
Here are some effective ways to start rebuilding your credit post-bankruptcy so you can qualify for affordable loan rates down the road:
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Obtain a secured credit card and use it responsibly by keeping your utilization low and making monthly payments in full and on time.
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Open a credit builder account and repay the small monthly payments as agreed until the account unlocks.
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Become an authorized user on a family member or friend’s credit card if they have good credit. Their on-time payments will be reflected on your credit reports.
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Limit new credit applications in the months following your bankruptcy discharge to avoid too many hard inquiries on your reports.
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Check your credit reports and dispute any errors with the credit bureaus to maximize your scores.
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Keep the balances low on all open revolving credit accounts to avoid high utilization rates that hurt your scores.
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Consider adding alternative data like rent, utility, or streaming service payments to your credit file via Experian Boost or UltraFICO. This can demonstrate positive payment behavior.
Waiting Several Years Before Applying May Be Best
The overall takeaway is that getting approved for a decent personal loan soon after bankruptcy will be very difficult in most cases. You’ll likely pay interest rates of 25-35% or higher if approved.
Your best option is to wait at least 2-3 years after your bankruptcy discharge to apply for a personal loan. Spend this time focused on rehabilitating your credit. It will take consistent effort, but you should begin seeing your credit scores slowly improve over time. Approval will get easier and interest rates will be lower the longer you wait.
Bankruptcy can feel like rock bottom, but it provides the opportunity for a fresh financial start. With patience and discipline, you can rebuild your credit post-bankruptcy and access more affordable mainstream lending options like personal loans and credit cards in the coming years.
Spotting predatory lending and personal loan scams
As you search for loans after bankruptcy, beware of predatory lenders and scammers. They tend to target people fresh out of bankruptcy since they might be in a more vulnerable position.
By offering loans that are nearly impossible to repay, predatory lenders make a quick dime by taking advantage of desperate borrowers.
You may have found a predatory lender if the loan has:
- A triple-digit APR
- A weeks-long repayment term
- A balloon payment due at the end of your term
You should be prepared for higher interest rates if you have bankruptcy on your credit report, but never settle for a loan with unfavorable terms. If you do, you could end up trapped in a debt cycle.
If your personal loan offer seems too good to be true, it probably is. Some personal loan scams exist to steal your identity, while others get you to sign up (and pay for) a loan even though the “lender” has no intention of disbursing funds.
Avoid being on the receiving end of a personal loan scam by watching out for the following red flags:
- Promises of guaranteed approval
- Upfront fees or payments required
- No credit checks
- Time-sensitive, high-pressure offers
Taking out a personal loan isn’t a decision to make lightly. Take your time and vet your lender before making a final decision.
Factors that affect your ability to get a personal loan after bankruptcy
When you filed for bankruptcy, you likely took one of the two most common paths: Chapter 7 or Chapter 13. The bankruptcy option you chose has a different impact on your personal loan eligibility.
- Chapter 7 bankruptcy: Also known as a liquidation bankruptcy, Chapter 7 requires you to sell some of your assets to repay eligible debt. This type of bankruptcy can stay on your credit report for up to 10 years.
- Chapter 13 bankruptcy: Also known as a repayment bankruptcy, Chapter 13 does not require you to sell your assets. Instead, you work out a three- to five-year repayment plan with your creditors. Chapter 13 usually remains your credit report for up to seven years.
At first, you might think your chances of obtaining a personal loan may be better if you’ve filed Chapter 13 bankruptcy instead of Chapter 7, but this isn’t always the case. Chapter 13 appears on your credit report for a shorter amount of time, but you are generally discouraged from applying for new credit during your Chapter 13 repayment period. Until your bankruptcy is discharged, you may even need to get permission from the court to borrow more money.
Your credit score is one of the most significant factors lenders look at when determining whether you qualify for a personal loan. If you don’t meet a lender’s minimum credit score requirements, they will deny your loan application. Your credit score also plays a big part in the interest rate you’re offered.
If you want to take out a personal loan after bankruptcy, it’s essential you improve your credit score by making payments on time and in full.
Another way to improve your credit score after bankruptcy is to use a secured credit card. Unlike a standard credit card, a secured card requires a refundable security deposit that also serves as your credit limit.
For example, if you deposit $200 onto your secured credit card, your limit is $200 (or less, depending on fees). If you fail to pay, the credit card company will collect your balance from your security deposit and possibly close your account. However, if you pay in full and on time, your credit score should increase, potentially unlocking access to other types of credit and lower interest rates.
How to Obtain a Personal Loan After Bankruptcy
Can a personal loan be discharged in a Chapter 7 bankruptcy?
In most cases, personal loans may be discharged in a Chapter 7 bankruptcy proceeding. A secured personal loan for which collateral has been pledged is included in discharged debts, but the asset put up as collateral will likely be sold to satisfy the debt. Recommended: Secured vs. Unsecured Personal Loans — What’s the Difference?
Can I get a personal loan after bankruptcy?
One way to improve your chances of qualifying for a personal loan after bankruptcy is to find a co-signer. A co-signer with good to excellent credit and sufficient income can boost your approval chances for a personal loan. You might also be able to secure a lower interest rate than you would have without a co-signer.
Does bankruptcy affect my personal loan eligibility?
The bankruptcy option you chose has a different impact on your personal loan eligibility. Chapter 7 bankruptcy: Also known as a liquidation bankruptcy, Chapter 7 requires you to sell some of your assets to repay eligible debt. This type of bankruptcy can stay on your credit report for up to 10 years.
Can I get a loan after Chapter 7 bankruptcy?
However, it’s easier for you to apply for loans after Chapter 7 bankruptcy because it takes less time to discharge your debt. On average, Chapter 7 bankruptcy takes about four to six months to complete. In contrast, it can take up to five years to discharge debt under Chapter 13 bankruptcy.