Personal loan after bankruptcy: how it works

You can still obtain credit after bankruptcy, but interest rates may be high

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What do you prioritize most?

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Filing bankruptcy can have a devastating impact on your finances. While it can help you get out from under unmanageable debt, it can also severely limit your ability to borrow money.

However, it is possible to obtain a loan once your case has been discharged or dismissed. Here's how it works and what you need to know before submitting your loan application.


Key insights

  • You can expect your credit score to drop up to 200 points when filing for bankruptcy.
  • Although bankruptcy can stay on your credit report for up to 10 years, your score can start to recover within 12 to 18 months.
  • The type of bankruptcy you filed, the amount of time since you’ve filed and your case status all influence your ability to get a personal loan after bankruptcy.
  • Other loan options are available if you cannot get approved for an unsecured loan.

What determines personal loan eligibility after bankruptcy?

Most lenders use traditional underwriting that considers your income, debts, monthly financial obligations and other application details. However, when you've filed for bankruptcy, there are additional factors that can affect your loan eligibility.

"Factors such as income, assets and type of bankruptcy may impact a lender's decision,” said Byron Meredith, a Chapter 13 trustee in Savannah, Georgia. “Also, the time between the bankruptcy discharge and the application for a new loan will be an important factor. These factors all contribute to your credit score, which lenders use to determine your creditworthiness for a personal loan."

Type of bankruptcy
There are two primary types of bankruptcy available to consumers: Chapter 7 and Chapter 13.
  • Chapter 7 is known as a "fresh start" and wipes out unsecured debt. This type helps consumers with little disposable income and overwhelming debt.
  • For debtors with adequate income to repay a portion of their debts, Chapter 13 provides a repayment plan of 36 to 60 months. Debtors make monthly payments to a Chapter 13 trustee, who then distributes money to creditors according to a court-approved plan.

Potential lenders may prefer to see a Chapter 13 bankruptcy on your credit report over a Chapter 7. This type of bankruptcy shows that you have adequate income above your monthly expenses. Plus, you have the ability to make regular payments to creditors, even if your repayment plan is for less than the full amount owed.

The status of your case
If your bankruptcy case is still active, the judge overseeing your case may be required to approve any additional debt you’d like to take on, so you may not be eligible to apply for new loans during an active bankruptcy.

But once your case has been discharged, you are free to pursue any loan application. A discharge signifies that your previous obligations have been settled and that you don't owe money to those creditors any longer.

Time since you filed
The longer it has been since you filed (and your case has been discharged), the more likely a lender will approve your loan after bankruptcy. Waiting gives your credit score time to recover and gives you an opportunity to showcase responsible credit use.

If you wait long enough to apply for a new loan, the bankruptcy may not even appear on your credit report. Typically, a bankruptcy filing falls off your credit after seven to 10 years.

Your credit score
When you file for bankruptcy, your credit score can drop 130 to 200 points or more. But over time, positive behaviors like paying bills on time, avoiding unnecessary hard inquiries and keeping a low utilization ratio can improve your score.

Before applying for a loan after bankruptcy, check your credit score to see if you meet the lender's qualifications . If not, keep working on rehabilitating your credit or consider other lenders with lower minimum requirements.

The type of loan you want
The type of loan that you're applying for can impact your eligibility. Lenders are more flexible when evaluating applications for secured loans than unsecured loans because they have an asset to seize if you don't make payments.

A loan's term length and amount can also have an impact. Smaller loan amounts and quicker repayment schedules reduce risk for lenders and can increase approval odds.

How to obtain a personal loan after bankruptcy

Even after filing for bankruptcy, you may still need to borrow money. While you likely won’t qualify for a loan immediately after entering bankruptcy, some lenders may be willing to approve you after a certain amount of time has passed or you’ve demonstrated responsible borrowing.

Following these steps can improve your chances of getting approved for a good personal loan after bankruptcy:

  • Get a copy of your credit report. Everyone can request free copies of their credit reports from all three major credit bureaus each year at AnnualCreditReport.com. Review the reports and dispute errors if you find any.
  • Monitor your credit score. Use free credit monitoring websites and tools to track your progress. Many banks offer free credit scores to their customers, and some, like Chase, offer free scores to those who aren’t their customers as well.
  • Check lender requirements. Every lender has different requirements for its ideal borrower. Many list those requirements on their websites, or you can call customer service to ask what they are.
  • Avoid predatory lenders. Some lenders may charge exorbitant interest rates and fees to unsuspecting borrowers. They take advantage of people who are in distress and often make their financial situation worse. Read lender reviews on sites like ConsumerAffairs before submitting a loan application.
  • Don't fall for scams. Some websites offer quick fixes for your credit problems in exchange for an upfront fee. These services may be scams that simply take your money without producing the promised results.
  • Avoid taking out more than you need. While it can be tempting to take more money if the lender offers it, only take out what you need. This keeps your monthly payments more affordable and reduces the chances of getting into financial trouble again.

If your credit score is too low to qualify for your preferred lender, take steps to improve your credit. Making all of your payments on time can improve your score over the long term. Reducing your credit utilization ratio, being added as an authorized user to a responsible borrower’s account or signing up for a service like Experian Boost, which reports things like utility payments to the credit bureaus, can provide more immediate results.

When you need money right away and can't wait for your score to improve, consider our list of the best bad credit loans. These lenders offer reasonable rates and fees to those with low credit scores.

» MORE: Bankruptcy makes loans more expensive, but not impossible

Other ways to obtain credit after bankruptcy

If you're having trouble getting approved for a loan after bankruptcy, there are other financing options available. The loans listed below all have their pros and cons, so consider them carefully before proceeding.

Secured loans

If you have assets, you may be able to pledge them as collateral for a loan. Lenders feel more comfortable with secured loans than unsecured loans because they can seize the assets that secure the loan if a borrower defaults. For example, you could have your loan secured by a certificate of deposit (CD) or other investments.

Derek Jacques, a consumer bankruptcy attorney with The Mitten Law Firm, recommends getting a secured credit card to start rebuilding your credit.

"Secured credit cards are one good way to help your credit,” he said. “By getting a secured card, you are limited to your deposit amount, and from there, you can build your credit back up over time."

401(k) loans

Retirement assets are generally protected in bankruptcy, and many debtors emerge from bankruptcy with their retirement savings intact.

Although this money is intended for retirement, some companies allow workers to borrow against their 401(k) or other workplace retirement accounts.

While these loans typically do not require credit approval, they are risky for several reasons:

  • Until the loan is repaid in full, ongoing contributions are generally used to pay down the balance rather than be invested in the market.
  • If you leave the company, the 401(k) loan may become due immediately.
  • If you cannot repay, it may be counted as a distribution, with income taxes and withdrawal penalties applying to the remaining balance.

Home equity loans or lines of credit

Homeowners may be able to keep their homes when filing bankruptcy. If you have equity that you can tap into, a home equity loan or a home equity line of credit (HELOC) can provide cost-effective financing. However, if you are unable to keep up with payments, you could lose your home.

Additionally, many banks have maximum loan-to-value ratios that limit the amount you're eligible to borrow.

A home equity loan generally has a fixed interest rate, a steady monthly payment and a defined repayment term. HELOCs usually have variable interest rates and payments that fluctuate based on how much you borrow. Remember that in a rising interest rate environment, HELOC payments could quickly escalate beyond your budget.

» MORE: How to get a mortgage after bankruptcy

What do you prioritize most?

FAQ

How soon will my credit score improve after bankruptcy?

While your score can plunge after filing for bankruptcy, you can take immediate steps to start the recovery process. With responsible use of credit, your score can improve within 12 to 18 months after filing.

When can I get a loan after bankruptcy?

Lenders typically allow debtors to apply as soon as their bankruptcy has been discharged. In some cases, you may get approved for a loan (like an auto loan) while your bankruptcy is still active.

Who will loan me money after bankruptcy?

Some lenders may not lend to people who've recently filed bankruptcy or who have a bankruptcy on their credit report. However, there are many lenders that specialize in borrowers with bad credit or who want to borrow after bankruptcy. These lenders may charge higher interest rates or fees, and their terms may be more strict than those of a traditional lender.

Bottom line

While filing for bankruptcy can provide breathing room in your budget, it can also have lasting negative effects on your credit and finances. If you need to apply for a personal loan to cover unexpected expenses, you may have a harder time getting approved with a bankruptcy in your credit report, although it is possible.

Your credit score drops up to 200 points after filing bankruptcy, but it will recover over time with responsible behavior. This can help you get approved for loans and qualify for better interest rates and lower fees.

If you need money sooner, other options like bad credit loans, secured loans and home equity loans are available. Just avoid falling further behind by managing new loans carefully and only taking out what you absolutely need.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Credible, " How to Get a Personal Loan After Bankruptcy ." Accessed Sept. 7, 2023.
  2. FindLaw, " How Soon Will My Credit Score Improve After Bankruptcy? " Accessed Sept. 7, 2023.
  3. Lefkovitz & Lefkovitz, " How To Purchase A Vehicle While In Chapter 13 Bankruptcy ." Accessed Sept. 7, 2023.
  4. SoFi, " Getting Approved for a Personal Loan After Bankruptcy ." Accessed Sept. 8, 2023.
  5. Intuit, " Can I get a car loan after bankruptcy? " Accessed Sept. 8, 2023.
  6. Debt.org, " How Bankruptcy Impacts Your Credit Score & How to Recover ." Accessed Sept. 8, 2023.
  7. American Bankruptcy Institute, " Bankruptcy Might Immediately Improve Your Credit ." Accessed Sept. 8, 2023.
  8. Intuit, " A personal loan after bankruptcy: Is it possible? " Accessed Sept. 8, 2023.
  9. Rocket Loans, " Bankruptcy Loans: Getting A Loan After Bankruptcy ." Accessed Sept. 8, 2023.
  10. TransUnion, " How Long Does Bankruptcy Stay On Your Credit Report? " Accessed Sept. 8, 2023.
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