Getting Personal Loans After Bankruptcy Discharge – What You Need To Know

Declaring bankruptcy can feel like a last resort when you’re facing insurmountable debt. While it may provide some financial relief, it also remains on your credit history for years and can make getting approved for new credit challenging. However, there are options for personal loans for discharged bankrupts if you need access to funds after bankruptcy.

I’ll provide an overview of how bankruptcy works, the differences between Chapter 7 and Chapter 13 bankruptcy, how it can impact your credit, and what to know about getting personal loans after a bankruptcy discharge. With some time and effort, you can rebuild your credit profile to potentially qualify for better loan rates in the future.

An Overview of How Bankruptcy Works

Filing for bankruptcy is a legal process governed by federal law that can provide debt relief by discharging or restructuring debts you can’t repay. It involves filing a petition in bankruptcy court and working with a court-appointed trustee who oversees the case.

The two most common bankruptcy options for consumers are:

• Chapter 7 bankruptcy: This liquidates your assets to pay creditors. Any assets exempt from liquidation under state law may be retained. Remaining dischargeable debts are wiped out.

• Chapter 13 bankruptcy This allows you to keep assets by agreeing to a 3-5 year repayment plan approved by the court You make payments to creditors through the trustee. After completing the plan, remaining dischargeable debts are eliminated

Some key things to know

• Certain debts like student loans, taxes, alimony, and child support cannot be discharged.

• The bankruptcy stays on your credit report for up to 10 years (Chapter 7) or 7 years (Chapter 13).

• You receive a discharge order from the court releasing you from liability for discharged debts.

• You can’t file for a new bankruptcy for 8 years (Chapter 7) or 4 years (Chapter 13) if the previous one was completed.

How Bankruptcy Can Impact Your Credit

A bankruptcy is considered a negative mark on your credit that can significantly lower your credit scores. However, the impact lessens over time as positive payment history builds.

You can take steps to rebuild credit during and after bankruptcy such as:

• Making payments on time for any active accounts or repayment plans.

• Keeping credit card balances low and avoiding new debt.

• Checking credit reports for errors and filing disputes.

• Becoming an authorized user on someone else’s account.

• Taking out a credit-builder loan and making on-time payments.

With a focused effort, you can demonstrate responsible credit management again over time.

What to Know About Personal Loans After Bankruptcy

You may be able to qualify for a personal loan after bankruptcy, but you’ll likely pay higher interest rates and fees compared to applicants with good credit. Each lender has its own approval criteria.

Here are some tips when seeking personal loans after bankruptcy discharge:

• Shop around and compare offers from multiple lenders. Online lenders may offer more options than traditional banks.

• Consider getting a co-signer with good credit to potentially improve your chances and terms.

• Only borrow what you need and can realistically repay to avoid setbacks in rebuilding credit.

• Read the fine print carefully and make sure you understand all terms, fees, and the annual percentage rate (APR).

• An installment loan with fixed payments can help demonstrate responsible usage compared to revolving credit card debt.

• Allow some time to keep improving your credit before taking on new loans unless essential.

While approval may be challenging in the months immediately following bankruptcy discharge, your options can open up after a year or two of positive credit history.

Tips for Qualifying for Personal Loans After Bankruptcy

Here are some suggestions to boost your chances of getting approved down the line:

• Wait 1-2 years after bankruptcy discharge – This allows some time for negative items to age and new positive history to start.

• Pay all current debts on time – On-time payments are crucial for rebuilding credit. Being current on existing accounts helps demonstrate responsibility.

• Keep credit card balances low – High balances compared to limits can negatively impact credit scores. Keep balances under 30% of the credit limit.

• Build savings – Having cash reserves helps compensate for risk of default in lenders’ eyes. Shoot for at least 3-6 months of living expenses saved.

• Become an authorized user on someone’s account – This can build your credit history if the primary user has a long positive record and makes you an authorized user.

• Take out a credit builder loan – Making on-time payments can demonstrate you can handle installment credit.

• Limit credit applications – Too many hard inquiries from applying can negatively impact credit, so be selective in applications.

• Check your credit reports – Verify all information is accurate and dispute any errors with credit bureaus.

With a proactive approach, you can potentially get approved for an affordable personal loan in the months or years following bankruptcy. Be patient with the process and make steady progress towards financial health.

What to Do If You Get Denied for a Personal Loan

If you get declined for a personal loan after bankruptcy, you have options:

• Ask the lender for specific reasons for the denial – This can give insight into where your credit profile is lacking so you can focus improvement efforts.

• Hold off and give it more time – Consider waiting another 6-12 months as the bankruptcy ages and your credit potentially improves before reapplying.

• Apply with other lenders – Each lender has its own approval criteria. Cast a wide net and compare offers from multiple sources.

• Get added as an authorized user – Becoming an authorized user on a creditworthy co-signer’s account can build positive history.

• Take out a secured loan – Secured loans require collateral but may offer better terms. The account can help build credit history.

• Try peer-to-peer lending – Individual investors may approve loans traditional lenders won’t. Interest rates may be higher.

• Improve your debt-to-income ratio – Pay down debts to lower your DTI. Lenders may view you as less risky.

• Build your credit – Give yourself more time to accrue positive history. On-time payments and lowering debt can help over the long run.

Persistence is key – with a diligent effort to build credit health, your prospects of loan approval after bankruptcy tend to gradually improve over time.

Alternatives if You Need Funds Soon After Bankruptcy

If you need access to funds soon after bankruptcy discharge but can’t qualify for a personal loan yet, some options to consider include:

• Borrowing from family or friends – If someone close to you can lend money, this avoids credit checks and lending criteria. Just be sure to formalize terms.

• 401(k) loan – You can borrow up to 50% of your vested 401(k) balance up to $50,000 and repay it over 5 years. No credit check required.

• Credit-builder loans – These report payments to credit bureaus. Making on-time payments can build positive history.

• Secured credit cards – These require a refundable security deposit and help establish positive usage history.

• Payday alternative loans – Offered by some credit unions, these small loans have terms capped at 6-12 months.

• Pledging assets as collateral – Banks may offer secured personal loans using assets like savings accounts or certificates of deposit as collateral.

• Crowdfunded personal loans – Websites like Upstart facilitate loans funded by individual investors. Rates may be higher.

The key is finding an option suitable to your financial situation that helps build credit health over time without saddling you with unmanageable debt.

Closing Thoughts

Filing for bankruptcy can negatively impact your finances for years. However, you aren’t doomed to bad credit forever. With some time and diligent effort, you can demonstrate responsible credit usage again.

Be strategic and patient when seeking personal loans after bankruptcy. Shop around, focus on improving credit health, and only borrow reasonably. It may take a year or more to qualify for affordable rates, but persistence can pay off.

Consider alternatives like secured loans or credit builder products in the interim. If you stay focused on financial responsibility, personal loans become realistic eventually. Bankruptcy doesn’t have to permanently bar access to credit if you work strategically to rebuild and strengthen your credit profile over time.