How to Get a Personal Loan After Bankruptcy

By Miranda Marquit, The Balance

Going through a bankruptcy can be tough—and disheartening. Your credit can be impacted for seven to 10 years, making it difficult to get certain loans.

The good news, though, is that you can still get a personal loan after bankruptcy. It might not be easy, and you might have to pay a higher interest rate, but it is possible.

Here’s what you need to know about getting a personal loan after bankruptcy.

Different Types of Bankruptcy and Getting a Personal Loan

The type of bankruptcy you end up with can make a difference in how soon you’re able to get a personal loan. However, in most cases, you can apply (and you might even get) a personal loan shortly after you finish bankruptcy proceedings. There are two types of bankruptcy that can impact your ability to borrow:

• Chapter 7: This is sometimes referred to as a “fresh start.” Your debts are wiped out, although the court will likely liquidate some of your assets to meet a portion of your obligations. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years.


• Chapter 13: Instead of wiping out your debts, you’re put on a court-ordered repayment plan, usually lasting between three and five years. With Chapter 13, the bankruptcy will drop off your credit report in seven years.

Either way, a bankruptcy can have a huge impact on your credit score, and the higher your score before the bankruptcy, the more significant the drop. The more time that elapses since your bankruptcy, though, the more your score improves—and the more likely you are to succeed in your loan application.

Following good habits after the bankruptcy can help you see improvement in your score, even with the bankruptcy still listed. You can apply for a personal loan anytime after the bankruptcy, but you have to be prepared to have your application denied, or to pay a higher interest rate. The length of time it takes to get the loan may vary, too. As a result, it might make sense to wait a year or two before seeking a loan.

Looking for a Personal Loan After Bankruptcy

As you get ready to apply for a personal loan after bankruptcy, here are some of the steps to follow:

• Check your credit reports: Get copies of your credit reports from AnnualCreditReport.com and make sure the information is accurate. After a Chapter 7 bankruptcy, your debts should be included and show a zero balance. Double-check that your Chapter 13 debt accounts are being properly reported, now that you’re paying as agreed.
  
  
• Prove your income: As you apply, you’ll need to prove your income. Pay stubs, W-2s, and other documents can show that you have sufficient income for the loan—even though you have a bankruptcy. Try to include side hustle or spousal income in the calculation, so lenders will view you as less risky.
  
  
• Prepare an explanation: You can prepare a letter explaining the circumstances that led to the bankruptcy and how you’re remedying the issue. If your bankruptcy was caused by medical costs or some other unforeseen issue, you might get a bit of a break.

Compare terms from a variety of lenders. Look online for the best personal loan providers and see what terms you’re offered. You might not qualify for the best rates, but you might still get something affordable. Compare online offers with what might be available at your bank or a local credit union.

Avoid High Rates and Fees

While you might have to pay higher rates when getting a personal loan after bankruptcy, there’s no reason to pay exorbitant rates. Watch out for payday lenders and others who advertise that they don’t do credit checks. While you might get a loan, the fees and interest might be so high that you end up back in the debt cycle.

You might be better off looking for alternatives to personal loans if you can’t qualify for a reasonable rate.

Alternatives to Getting a Personal Loan

If you can’t qualify for a personal loan after bankruptcy, you do have some options. Here are three things to try if you can’t get a “regular” personal loan.

• Credit-builder loan: Some smaller financial institutions offer you the option to borrow small amounts, generally up to $1,000. The money is deposited in an account owned by the bank, and you make monthly payments plus interest. Before you proceed, make sure the institution will make regular reports to the credit bureaus.


• Secured credit card: Instead of getting a personal loan, consider getting a secured credit card. You’re required to provide cash as collateral, but many secured cards report to the credit bureaus, helping you build your payment history. Plus the interest rate is likely to be lower with a secured card than what you’d see with many bad credit personal loans.


• Ask someone to co-sign a loan: If you have a loved one willing to take joint responsibility for the loan, they can co-sign. The lender looks at their credit history and score instead of yours, providing you a way to still get a loan.

In all of these cases, however, you need to make on-time payments if you want your score to improve. Once you’ve used these methods to boost your score, you might be more successful in your next attempt to apply for a personal loan after bankruptcy.

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