Your chances of qualifying for a personal loan after a bankruptcy might become higher as time goes by. A bankruptcy will remain on your credit reports for up to seven to 10 years, but with effort, your credit scores can become healthier during that time and beyond.
If you are approved for a personal loan, you likely will pay fees or a higher interest rate than you might have without having a bankruptcy on your credit report.
How Does Bankruptcy Work?
When a person can’t make payments on their outstanding debts, despite trying to do so, bankruptcy may be an option to have a fresh financial start.
Bankruptcy can be either a liquidation of the debtor’s assets to satisfy creditors or the creation of a repayment schedule that will satisfy creditors and allow the debtor to keep their property instead of liquidating it.
Filing for Bankruptcy
Bankruptcy petitions are filed with the bankruptcy court in the debtor’s judicial district. The process is mostly administrative, with minimal time spent in front of a judge — often no time at all unless there is an objection by a creditor. A court-appointed trustee oversees the case.
The debtor must attend a “341 meeting” (named for section 341 of the Bankruptcy Code), at which creditors can present questions and concerns. For Chapters 7 and 13 bankruptcies, which are being discussed here, the remainder of the process differs slightly. Read on for specifics about each of these types of bankruptcies.
Can I Get a Loan With a Discharged Bankruptcy?
It’s not impossible to get a loan after bankruptcy, but interest rates may be high and loan terms less favorable than for someone who hasn’t been through a bankruptcy. The negative effect a bankruptcy has on a person’s credit lessens over time, but lenders may not be willing to offer their best rates to someone they perceive as not having been financially responsible in the past.
Two Main Types of Bankruptcy Filings
There are two main types of bankruptcy available to individuals, Chapter 7 and Chapter 13. With both, typically a bankruptcy trustee reviews the bankruptcy petition, looks for any red flags, and tries to maximize the amount of money unsecured creditors will get.
About 70% of the petitions in 2021 were filed under Chapter 7, and 30% were filed under Chapter 13.
Chapter 7 Bankruptcy
This is often called liquidation bankruptcy because the trustee assigned to the case sells, or liquidates, nonexempt assets in order to repay creditors.
Many petitioners, though, can keep everything they own in what is known as a “no-asset case.” Most states allow clothing, furnishings, a car, money in qualified retirement accounts, and some equity in your home if you’re a homeowner to be exempt from liquidation. (Each state has a set of exemption laws, but federal exemptions exist as well, and you might be able to choose between them, a subject a bankruptcy attorney should be able to provide insight on.)
After the bankruptcy process is complete, typically within three to six months, most unsecured debt is wiped away. The filer receives a discharge of debt that releases them from personal liability for certain dischargeable debts.
Are Personal Loans Covered Under Chapter 7?
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?
The Pros and Cons of Chapter 7 Bankruptcy
A Chapter 7 bankruptcy can create a fresh start for someone struggling to repay their debts, but it’s not a magic wand. Here are some pros and cons:
| Pros of Chapter 7 Bankruptcy | Cons of Chapter 7 Bankruptcy |
|---|---|
| Debtors are free of personal liability for discharged debts. | Some types of debt, such as student loan or tax debt, cannot be discharged. |
| Certain assets may be exempt from bankruptcy, giving the debtor some property to sustain themselves. | A trustee takes control of the debtor’s assets. |
| If all of a debtor’s assets are deemed exempt, the bankruptcy is termed a no-asset bankruptcy. | Creditors will not receive any funds from the bankruptcy because there won’t be any assets to liquidate. |
Chapter 13 Bankruptcy
This form, aka reorganization bankruptcy or a wage earner’s plan, allows petitioners whose debt falls under certain thresholds to keep their assets if they agree to a three-to-five year repayment plan.
There are three types of claims in a Chapter 13 bankruptcy: priority, secured, and unsecured. The plan must include full repayment of priority debts. A trustee collects the money and pays the unsecured debts, with the individual debtor having no direct contact with the creditors. Secured debts can be handled directly by the debtor.
Once the terms of the plan are met, most of the remaining qualifying debt is erased.
The U.S. Bankruptcy Code specifies that if the debtor’s monthly income is less than the state median, the plan will be for three years unless the court approves a longer period. If the debtor’s monthly income is greater than the state median, the plan generally must be for five years.
Certain debts can’t be discharged through a court order, even in bankruptcy. They include most student loans, most taxes, child support, alimony, and court fines. You also can’t discharge debts that come up after the date you filed for bankruptcy.
Are Personal Loans Covered Under Chapter 13?
Personal loans can be discharged in Chapter 13 bankruptcy, but whether a creditor is likely to be repaid in full depends on if the personal loan is secured or unsecured. Priority claims are paid before any others, followed by secured, then unsecured claims.
The Pros and Cons of Chapter 13 Bankruptcy
Debtors who have assets they’d rather not have liquidated might opt for Chapter 13 bankruptcy vs. Chapter 7, which involves liquidation of most assets. But like any type of bankruptcy, there are pros and cons.
| Pros of Chapter 13 Bankruptcy | Cons of Chapter 13 Bankruptcy |
|---|---|
| Debtors may be able to save their assets, such as their home, from foreclosure. | If the repayment plan is not followed, the bankruptcy could be converted to a liquidation under Chapter 7. |
| Debtors may opt to make payments directly to creditors instead of through the trustee. | Living on a fixed budget for the duration of the repayment plan will take some adjustment. |
| Debtors have more options to repay their debts than they might under Chapter 7. | Chapter 13 bankruptcy is more complex than Chapter 7, and may lead to higher legal costs. |
| Debtors can extend repayment of secured, non-mortgage debts over the life of the plan, likely lowering their payments. | Taking more time to repay the secured installment debt may lead to more interest before it’s paid in full. |
Recommended: What Is an Installment Loan?
Will Bankruptcy Ruin My Credit?
A bankruptcy will be considered a negative entry on your credit report, but the severity depends on a person’s entire credit profile.
Someone with a high credit score before bankruptcy could expect a significant drop in their credit score, but someone with negative items already on their credit reports might see only a modest drop.
The good news is that the negative effect of the bankruptcy will lessen over time.
Lenders who check credit reports will learn about bankruptcy filing for years afterward. Specifically:
• For Chapter 7, up to 10 years after the filing.
• For Chapter 13, up to seven years.
Still, filing for bankruptcy doesn’t mean you can’t ever get approved for a loan. Your credit scores can improve if you stay up to date on your repayment plan or your debts are discharged — among other steps that can be taken.
You may even be able to help your credit scores during bankruptcy by making the required payments on any outstanding debts, whether or not you have a repayment plan. Of course, everyone’s circumstances and goals are different so, again, always consult a professional with questions.
That said, some lenders may deny credit to any applicant with a bankruptcy on a credit report.
Recommended: What Is Considered a Bad Credit Score?
How Long After Bankruptcy Discharge Can I Get a Loan?
As long as you can find a lender willing to approve you for a loan, there is no definite amount of time needed to wait until applying for one. However, your credit report will reflect a discharge for seven to 10 years, and lenders may not offer favorable terms or interest rates.
Recommended: How to Read a Credit Report
Should I Apply for a Loan After Bankruptcy?
Making sure you are in a stable financial situation after bankruptcy is a good idea before thinking about applying for a loan at that time. Having a repayment plan that you can stick to before taking on more debt is imperative. That being said, taking out a loan and repaying it on time and in full can be a good way to rebuild your credit.
Before applying for an unsecured personal loan, meaning a loan is not secured by collateral, it’s a good idea to get copies of your credit reports from the three major credit reporting agencies: Equifax™, Experian™, and TransUnion®. Make sure that your reports represent your current financial situation and check for any errors.
If you filed for Chapter 7 bankruptcy and had your debts discharged, they should appear with a balance of $0. If you filed for Chapter 13, the credit report should accurately reflect payments that you’ve made as part of your repayment plan.
Next, you can consider getting prequalified for a personal loan and comparing offers from several lenders. They will likely ask you to supply contact and personal information as well as details about your employment and income.
If you see a loan offer that you like, you’ll complete an application and provide documentation about the information you provided. Most lenders will consider your credit history and debt-to-income ratio, among other personal financial factors.
You may want to think carefully before considering “no credit check” loans: They typically have high fees or a high annual percentage rate (APR).
If You’re Approved for a Personal Loan
Before you sign on the dotted line, it’s smart to take the following steps:
Read the Fine Print
If you’ve had a bankruptcy on your record, the terms of your offer may be less than favorable, so consider whether you feel like you’re getting a reasonable deal.
People with credit scores considered average or bad might see APRs on personal loans ranging from nearly 18% to 32%. Make sure you are clear on your interest rate and fees, and compare offers from different lenders to make the choice that works for you.
Avoid Taking Out More Than You Need
You’re paying interest on the money you borrow, so it’s generally better to only borrow funds that you actually need. Further, it’s probably wise to only take out as much as you can afford to repay on time, because paying on time is an important key to rebuilding your credit. Having a focused plan for what you’ll spend the personal loan funds on may give you some incentive to manage it responsibly.
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If You’re Not Approved for a Personal Loan
If you are denied a personal loan, don’t despair. You may have options for moving forward:
Appealing to the Lender
You can try to explain the factors that led you to file for bankruptcy and how you have turned things around, whether that’s a record of on-time payments or improved savings. The lending institution may not change its mind, but there’s always a possibility the lender can adjust its decision case by case.
You likely have the best chance at an institution that you’ve worked with for years or one that is less bound to one-size-fits-all formulas — a local credit union, community bank, online lender, or peer-to-peer lender.
Looking Into Applying With a Co-signer
A co-signer who has a strong credit and income history may be able to help you qualify for a loan. But keep in mind that if you can’t pay, the co-signer may be responsible for paying back your loan.
Building Your Credit
It’s OK to take some time to try to improve your credit scores before reapplying for an unsecured personal loan. You still have a chance to work toward reducing your other debt. There are many types of personal loans available, and a little waiting time to consider what’s right for you isn’t a bad thing.
The Takeaway
Getting approved for an unsecured personal loan after bankruptcy isn’t impossible, but it’s a good idea to compare offers, go in with eyes wide open about interest rates and fees, and gauge whether it’s the right time to borrow.
SoFi offers unsecured fixed-rate personal loans with no fees required. Adding a co-borrower may help you qualify for a loan or a lower interest rate.
FAQ
Can I get a loan with a discharged bankruptcy?
Yes, it is possible to get a loan after bankruptcy, but the rates and terms may be less than favorable.
Are personal loans covered under Chapter 7?
Yes, personal loans can be discharged under Chapter 7 bankruptcy.
Are personal loans covered under Chapter 13?
As with Chapter 7, personal loans can be discharged under Chapter 13 bankruptcy. Secured personal loans will take priority over unsecured personal loans, however.
How long after bankruptcy discharge can I get a loan?
There is no set time a person must wait in order to apply for a loan after bankruptcy discharge. Each lender will have its own conditions for approval.
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