Can You Get a Loan After Bankruptcy?

When you are in bankruptcy, applying for a loan may be the furthest thing from your mind. The process leaves …

When you are in bankruptcy, applying for a loan may be the furthest thing from your mind. The process leaves your credit in tatters, but that can change in a matter of years if you put in a constant effort.

“People can absolutely recover from bankruptcy,” says Jordan van Rijn, senior economist at the Credit Union National Association. “It just takes time and a little patience. ”

If you are considering loans after bankruptcy, expect to wait at least a year or two before qualifying for traditional loans. But don’t count on other options. Here’s what you need to know.

What is bankruptcy?

Bankruptcy relieves most, if not all, of your debt, but it comes at a price: a damaged credit report and lower credit scores.

Two of the most common types of personal bankruptcy are Chapter 7 and Chapter 13.

In Chapter 13 bankruptcy, you can keep assets like a house or a car as long as you have reliable income. You can get court approval for a three to five year repayment plan, after which your debts will be discharged.

In contrast, Chapter 7 requires you to liquidate all qualifying assets, although some items, such as cars and furniture, may be exempt. And your income cannot exceed an amount designated by the government.

How Does Bankruptcy Affect Your Credit?

Bankruptcy will dramatically affect your credit score and stay on your report for seven to ten years, says Rod Griffin, senior director of consumer education and advocacy at Experian.

Paying off debt can help you start fresh, but it doesn’t erase months or years of financial trouble, such as missed loan payments and runaway balances. These marks on your credit report will hurt your credit score for quite a while.

[Read: Best Bad Credit Loans.]

“After a Chapter 7 discharge, your credit scores won’t necessarily bounce back. Although accounts released in bankruptcy will no longer show a balance owing, they will still remain on your credit report, ”Griffin said. “The statute will show that they have been discharged from bankruptcy, and any late payments that occurred before filing for bankruptcy will also remain on your report for up to seven years.”

How Can You Increase Your Credit Score After Bankruptcy?

The most important job after bankruptcy is to repair your credit, which will eventually help you get approved for credit cards and loans again.

“The key to rebuilding your credit score is to have an open, active account with a history of on-time payments,” says Griffin.

Some consumers may keep an account or two when they go bankrupt, which is called reaffirming debt, Griffin says. “If that’s the case, make sure every payment is made on time so you can show lenders that you’re handling the account responsibly,” he says.

A good way to start your path to credit recovery is to apply for a manufacturer credit. These are short-term loans ranging from around $ 200 to $ 1,000 and are not used as an investment or to buy anything in particular, explains van Rijn. You can usually find them at credit unions or community banks.

Griffin suggests other ways to improve your credit score after bankruptcy:

– Apply for a secure credit card, a card with a line of credit typically less than $ 1,000 and backed by your own money. Work with a bank or credit union where you already have a checking or savings account. If you make your payments on time for a while, you will likely switch to an unsecured card.

– Become an authorized user on an account. This could improve your credit score if the account is in good standing.

– Get a co-signer for a credit card or loan.

– Use a tool like Experience boost or UltraFICO, which takes alternative data into account in your credit report by monitoring items such as rent and utility payments. However, lenders may not use this data for your loan application.

How Long Does It Take To Get A Loan After Filing For Bankruptcy?

For some loans, you will have to wait at least two years after bankruptcy before you apply. You want to have a positive credit history and have plenty of time between your loan application and bankruptcy.

[Read: Best Personal Loans.]

“It can be difficult to qualify for a loan after filing for Chapter 7, especially if bankruptcy was recent,” Griffin said. Your eligibility will likely depend on several factors, such as:

– How long have you filed for bankruptcy?

– If you have established a positive account history since your bankruptcy.

– The type of loan you are applying for.

“If you qualify, you will almost certainly have to pay higher interest rates and other fees, especially if your bankruptcy is recent,” says Griffin.

For example, if your credit score is consistently fair or very bad – which is considered lower than 670 on FICO – expect to pay a higher interest rate than someone with a higher score.

Here is an overview of the ways to get approved for common loans:

Unsecured loans: Credit cards and personal loans are types of unsecured loans. Soon after bankruptcy, you are more likely to qualify for credit cards with high interest rates and low maximum balances (up to around $ 2,000) than with something like a personal loan. of $ 10,000, says van Rijn.

Mortgages : It will likely take a few years for your credit score to be high enough to be considered for a conventional mortgage with a reasonable interest rate.

Probably the easiest way to qualify is a government guaranteed loan with lower credit score requirements.

If you file for Chapter 7 bankruptcy, you will wait at least two years after your loan is released before you can apply for loans with the Federal Housing Administration or the Department of Veterans Affairs. However, if you are applying for Chapter 13, your waiting period might be just one year after you start your bankruptcy payment period for the FHA and one year from the date of filing your Chapter 13 for VA.

Other types of mortgages you may be eligible for may be less attractive, with high interest rates and lump sum payments.

[Read: Best FHA Loans.]

“It may take a while before you can qualify for a mortgage or other large loan with a lower interest rate and better terms, but try not to be discouraged,” Griffin says. “As long as you develop good spending and payment habits as you rebuild, your credit scores will start to reflect this over time.

Beware of loan and credit scams

When you’ve struggled for years to improve your credit score, you may be tempted to look for shortcuts. But that’s exactly what unscrupulous businesses look for when they cheat on you with loans and credits. scams.

For example:

– Upfront commission loans, in which you are guaranteed approval if you provide $ 100 or more, may be illegal. The Federal Trade Commission prevents anyone who guarantees that you will get a loan from asking for prepayment. Legitimate lenders will ask you to go through a loan approval process, but won’t guarantee acceptance upfront.

– Credit repair companies can make promises they can’t keep, like removing specific negative information from your credit report, and asking for money up front. Know that you can take most credit improvement steps yourself for free.

As you recover from bankruptcy, you may need to make major changes to the way you spend and manage your debt while planning for the future. It might be difficult to balance your post-bankruptcy recovery with a loan until you are truly prepared to take on the responsibility.

“Remember, the whole point of bankruptcy is to reset your personal finances,” Griffin says. “If you’re in a hurry to get into more debt, you haven’t understood. ”

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