Filing for bankruptcy can be one of the most devastating experiences of your life. The financial impact is far-reaching, from hurting your credit to potentially losing some of your assets. But the emotional consequences can feel even more intense. Many people who file for bankruptcy can have a sense of failure and hopelessness, not to mention the mental toll of dealing with creditors and the legal process.
While bankruptcy can feel like an isolating experience, it’s not uncommon. In 2017, more than 740,000 people filed for personal bankruptcy.
Back in 2010, after the Great Recession, there were nearly 1.6 million bankruptcy filings , and there are still 1.7 million ongoing bankruptcy cases in the U.S.
For those recovering from bankruptcy, you should know that bankruptcy does harm your credit score and can make it more difficult to take on new debt at reasonable interest rates. Here are some key things you need to know if you’re looking to qualify for a loan after bankruptcy, whether you filed for Chapter 7 or Chapter 13. But of course, this information isn’t intended to serve as legal or tax advice—SoFi always recommends that you consult your own attorney and/or tax advisor.
Types of Bankruptcy Filings
Filing for bankruptcy involves bringing a case under federal law in order to wipe out your debts. This process gives people who are overwhelmed by debt a way to deal with their burden and start over, while allowing creditors to be treated fairly. There are two main types of bankruptcy available to individuals:
Chapter 7 bankruptcy
A trustee takes over your assets and liquidates them, or turns them into cash. The money is then doled out to creditors based on priorities in the federal Bankruptcy Code. You may be able to keep certain assets, such as your home, clothing, or furniture, depending on your state. After the bankruptcy process is complete, most of your unsecured debt is wiped away, giving you the opportunity for a fresh start.
Chapter 13 bankruptcy
You can keep your assets but must agree to a repayment plan for a period of three to five years. A trustee collects the money and pays your creditors, as well as ensuring you honor the repayment plan. Once you’ve met the terms of the plan, most of the remaining debt is erased.
This type of bankruptcy is available to people who have a regular income with debt that fall below a certain limit (currently, that’s around $1.18 million in secured debts, such as mortgages, and $394,725 in unsecured debts, such as personal loans or credit card bills). You usually have to file for Chapter 13, rather than Chapter 7, if you make more than your state’s median income.
Certain debts can’t be eliminated, or “discharged” through a court order, even in bankruptcy. These include most student loans, most taxes, child support, alimony, and court fines, among other things. You also can’t discharge debts that come up after the date you filed for bankruptcy.
Can You Get Approved for a Personal Loan after Bankruptcy?
It depends. But remember that depending on the type of bankruptcy you file, bankruptcy can negatively impact your credit score for years .
Bankruptcy can put you at a disadvantage when it comes to qualifying for new credit cards or loans, and some lenders don’t offer personal loans at all to people with a bankruptcy on their records. Even if you get approved, it can be difficult to get loans with favorable terms or low interest rates.
Lenders who check your credit report will learn about a Chapter 7 bankruptcy for up to 10 years after the filing, while a Chapter 13 bankruptcy will stay on your credit report for up to seven years.
Still, filing for bankruptcy doesn’t mean you can’t ever get approved for a loan. Even though your credit score might take a dip after filing for bankruptcy, it may improve shortly thereafter, especially if you stay up to date on your repayment plan or your debts are discharged.
One study found that people in Chapter 13 bankruptcy protection saw their credit scores increase by 17 points over the first five years after filing.
You may even be able to help your credit score during bankruptcy by making the required payments on any outstanding debts, whether or not you have a repayment plan. The faster you can take steps to improve your credit, the sooner you can feel like your financial life is back on track.
Should You Apply for a Personal Loan after Bankruptcy?
Before you submit your applications, it’s a good idea to get copies of your credit report 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 applying for personal loans, and do so with several lenders, whether traditional banks or online, so that you can compare offers. The lenders will likely ask you to supply contact and personal information, as well as details about your employment and income.
Make sure you’re ready to show evidence of your income, and don’t forget to include all sources of cash, including a side hustle. Of course, the lender will likely also consider your credit history and debt-to-income ratio.
What to Do if You Get Approved for a Personal Loan
Before you sign on the dotted line, it’s smart to take the following steps:
Read the fine print.
Since you have or 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 “average” or “poor” credit might see average annual percentage rates on their personal loans ranging from 18% APR to 32% APR. 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.
What to Do if You Don’t Get Approved for a Personal Loan
If you are denied a personal loan, don’t despair. You may have several 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. They may not change their minds, but there’s always a possibility they can adjust their decision on a case-by-case basis.
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—such as a local credit union, community bank, online lender, or peer-to-peer lender.
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, they will be responsible for paying back your loan.
Building Your Credit
It’s okay to take some time to try to improve your credit score before re-applying for a personal loan. You still have a chance to work toward reducing your other debt, such as credit card balances or student loans.
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice about bankruptcy.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.