Filing for bankruptcy is a last resort for most people, but this strategy can discharge most consumer debts and prevent debt collectors from trying to collect on those debts in the future.
While bankruptcy can offer relief to those struggling to manage debilitating debt, it will negatively impact their credit for several years. This can make it challenging to apply for new credit or get a personal loan.
Can I get a personal loan after bankruptcy?
Getting a personal loan after bankruptcy is possible, but it’s not the easiest process and will take time. There are two main types of bankruptcy. Chapter 7 bankruptcy discharges unsecured debts such as credit cards, medical bills, and personal loans. Chapter 13 bankruptcy allows individuals with a regular income to get on a specific payment plan to repay creditors over three to five years.
Filing for Chapter 7 and 13 bankruptcy means your credit score is likely to drop by 100-plus points, and the record can stay on your credit report for up to 10 years. Having a lower credit score makes it harder to get approved for loans. If you are approved, lenders tend to offer higher interest rates to protect the risk of working with bad-credit borrowers.
Beware of loan scams that may state you can be approved to borrow money right away even if you’ve filed for bankruptcy. Legitimate lenders have their own requirements and loan terms and won’t guarantee anything before reviewing your application.
It’s also important to check that a lender is accredited by the Better Business Bureau (BBB) and has credible reviews before sending any of your personal information. If no one has heard of the company and the offer sounds too good to be true, it probably is.
How to apply for a personal loan after bankruptcy
While bankruptcy can stay on your credit report for several years, the negative effect will decrease over time. Consider taking the following steps if you feel ready to apply for a personal loan after bankruptcy.
1. Check your credit report
Start by looking at your credit report to see where you stand. You can request a free full credit report from all three major credit bureaus once per year at AnnualCreditReport.com. Also, be sure to check your actual credit score with each credit bureau.
Knowing your credit score in advance will help you set realistic expectations on the type of personal loan you may qualify for.
2. Compare lenders and prequalify
Next, start comparing lenders and shopping around to see who offers the best terms. Some lenders do encourage borrowers who’ve filed for bankruptcy to apply. Either way, you’ll want to prequalify first, which only results in a soft credit check.
Most lenders allow you to prequalify online by completing a short form and providing basic information about yourself and your income.
3. Choose a loan
The next step is to choose a loan that has terms you like. Compare factors like the interest rate, borrowing amount, term options, and fees to find the best loan offer for your needs.
4. Complete the application
Once you’ve chosen a lender, start the application process by submitting more information about your finances and uploading supporting documents. Most lenders will run a hard credit check at this stage — which will temporarily ding your score further.
Lenders also might request information like your pay stubs, Social Security number, and the amount of other monthly debt payments. Once your loan application is submitted, it will be processed and the underwriter will verify all your information.
5. Receive your funds
If you’re approved for a personal loan, when you’ll receive your loan funds depends on what options the lender provides. However, first, you must sign the loan agreement and agree to all the terms. This is the perfect time to ask questions about fees, payment schedules, or anything else before you accept the funds and start using the money.
Applying for a personal loan with a bankruptcy on your record can make it hard to get approved. However, you may want to consider using a cosigner if you have a friend or family member with good credit.
Using a cosigner could help you get better loan terms such as a lower interest rate. Just keep in mind that your cosigner will be responsible for repaying the loan if you fail to. Make sure your cosigner is aware of this and any other terms before they agree to apply for a personal loan with you.
Related: Learn more about getting a personal loan
What to avoid when looking for a loan after bankruptcy
When looking for a loan after bankruptcy, it’s crucial to avoid scams. Certain scam artists may prey on bad-credit borrowers who’ve filed for bankruptcy and are eager to get approved for a loan.
Verify that the lender is legitimate by checking reviews across several credible platforms, seeing if they have a BBB rating, and even calling the number on the website. Don’t give away any personal information until you can confirm that the lender is legitimate.
Other options to avoid include:
How soon will my credit score recover?
Chapter 7 bankruptcy can remain on your credit report for up to 10 years, while Chapter 13 bankruptcy can stay on your report for up to 7 years. The time it takes your credit score to recover after bankruptcy varies depending on your situation.
With each passing year, bankruptcy will typically have less of an effect on your credit score. You can also work on building a positive credit history by paying bills on time and working through your payment plan if you’ve filed for Chapter 13. In some cases, a credit-builder loan can help you jump-start the process.
With a credit-builder loan, you get a chance to build your savings and your credit at the same time by making payments that go into an account and get reported to the major credit bureaus.
Getting a personal loan after bankruptcy is possible, but takes time. Bankruptcy negatively impacts your credit score for a while, but the negative impact on your score lessens over time. It’s best to focus on building positive credit history with healthy financial habits along with considering lenders with more lenient eligibility requirements.