Guest Author: Alicia Rennoll
The 2018 calendar year saw the filing of 775,578 bankruptcy cases in the US, the majority of which were by individuals, not businesses, according to the Administrative Office of the U.S Courts. Although filing for bankruptcy is a way out of drowning in overwhelming debt, it usually has dire repercussions on your credit score, thereby harming your chances of getting approved for loans. This is, however, not to mean you cannot get loans after filing for bankruptcy. While it is true that your credit score takes a dive after bankruptcy and its importance in taking on new debt cannot be overstated, there are a few things you can do to ensure you get approved for a loan after discharge.
The longer you wait for your bankruptcy to age, the more likely you are to get loans with favorable terms. Most lenders run reports through the major credit agencies in the USA, namely TransUnion, Experian and Equifax. If you filed for Chapter 7 bankruptcy, which involves the liquidation of nonexempt assets in order to be discharged from debt, lenders will be able to see your bankruptcy record for up to 10 years. If you filed for Chapter 13 bankruptcy, which usually involves a repayment plan stretched over 3-5 years, they will be able to learn of the incident up to 7 years after its occurrence. Once they see a bankruptcy record, most will be inclined to deny your requests, as they will see you as a higher risk. It’s therefore advisable to take some time before applying for a loan to rebuild your credit.
This shouldn’t be so hard as bankruptcy resets your financial life and absolves you of most debts, which means you get a clean slate. A study by Princeton University showed that filing for bankruptcy improves one’s credit score by 17 points within the first 5 years. You can rebuild your credit score by taking the following steps:
Ensure you pay all your bills on time
Do not accrue any more debt after discharge
Stick to your repayment plan if you filed for Chapter 13 bankruptcy, and
Take care of debts such as student loans that aren’t cleared by filing for bankruptcy.
Once you have made an effort to rebuild your credit score, you can apply for a loan, but first you will need to check your credit history. Again, most lenders check your credit history before issuing out loans. That said, you need to ensure that your credit report across all major credit reporting agencies reflects your current financial status. If you applied for Chapter 13 bankruptcy, it should reflect all the payments you have made, and if you filed for Chapter 7 bankruptcy, you should have a balance of $0. You should also ensure the dates listed for your bankruptcy filing and discharge are accurate, as they are more often than not documented incorrectly.
If you’re only looking for a smaller, short-term loan, a traditional credit provider may not be your best bet. A peer-to-peer lending and borrowing app such as SoLo Funds may be a better fit for your needs, especially because you do not need to reach the threshold of a certain credit score in order to become a borrower. Technology has revolutionized the personal financial tools available to individuals over the past 10 years, so don’t be afraid to do some research and see what other options may exist to help improve your financial situation.
Once your credit report is in order, you can proceed to apply for a loan. To do this you will be required to provide your personal information, as well as proof of address, employment and a source of income, so ensure you are ready with documents that verify these factors. You will also be asked to state the amount of loan you want and its intended use. To better your odds, try credit unions; peer-to-peer lenders; organizations like Loans Under 36, which give loans to people with bad credit; cosigning the loan; or putting up collateral.
The chances are that even if you get approved, the terms of your loan will be less favorable compared to those of an individual with excellent credit. You can expect to pay higher fees and interest rates of up to 18%-32% APR depending on your exact score. You should, therefore, place loan applications with several lenders so you can compare the terms and settle for one that is most reasonable. Make sure you read the fine print and understand how much you will be required to repay and when. Most importantly, select a loan with terms that are likely to provide you with the ability to make your monthly payment requirements, otherwise you risk compounding your debt.
If you do get loan approval, do not be tempted to take out more cash than you need or can repay, especially since the interest rates are higher. Although challenging, getting a personal loan after bankruptcy is certainly possible, and following the right steps will better your odds to secure a line of credit.