When someone decides to file for bankruptcy, they must consider a series of consequences, positive and negative. For one thing, filing for bankruptcy allows you to pay off or discharge your debts, and start over, but is it possible to get a personal loan after bankruptcy?. Even though it is a new opportunity to rebuild financially, filing for bankruptcy will affect your credit score. This will surely affect you when trying to get a personal loan after bankruptcy.
If you are considering bankruptcy as an alternative to improve your financial situation. Or even if you have already gone through the bankruptcy process and need advice to rebuild administratively and financially, contact us. Our experienced New York bankruptcy lawyers are ready to assist you at any stage of the process.
Get a personal loan after bankruptcy in 2022
We have good news: Getting a personal loan after bankruptcy is possible. However, you should consider that the lenders will surely make it more difficult for you to access a loan.
After going through bankruptcy, your credit score will be affected. This means that when applying for a personal loan after bankruptcy, it will be more difficult to meet the requirements for approval. If successful, you will most likely get unfavorable loan terms.
You should know that some lenders offer no credit check loans. But these, as we mentioned, often have very high interest rates or fees, which can lead to a debt trap.
It is important in this process that you compare the different lender alternatives. This can be especially important when looking for a personal loan, and you may want to start with credit unions, community banks, and online lenders. These organizations may focus on smaller personal loans or borrowers with little credit.
Bankruptcy and its consequences on the credit score
For individuals, there are two main types of bankruptcy in the United States. These are governed by Chapter 7 and Chapter 13 of bankruptcy law. Both cases are frequently filed by people with consumer debts, such as credit card debt or personal loans. Keep reading. Here are both cases and the consequences on your wealth and credit score.
Note: Read How to File for Bankruptcy in New York and take a closer look at the types of bankruptcy that exist in the United States.
Bankruptcy Chapter 7
This case involves an orderly and court-supervised procedure. This designates a trustee who takes charge of the non-exempt assets of the debtor’s patrimony. Then they liquidate those assets (reduces to cash) and makes payment distributions to creditors, to pay off debts.
Let’s review the important points:
- Chapter 7 bankruptcy is commonly known as liquidation bankruptcy.
- In this case, the court liquidates your assets to pay off creditors and lenders.
- Once the court liquidates your assets and pays your creditors and lenders, it discharges any remaining balance.
- The asset liquidation alternative may sound scary and extreme, but the reality is that the court will not sell everything you own. Personal property, clothing, your home, retirement savings, and others are exempt from the settlement.
- This type of bankruptcy allows you to complete the debt elimination process quickly. This allows you to start your new financial life early.
- You should consider that filing for Chapter 7 bankruptcy costs $ 335.
Note: If you are interested in knowing in detail about this personal bankruptcy alternative, you can review our complete article on filing for bankruptcy Chapter 7. In it you will find all the requirements, and the implications of this decision.
Bankruptcy Chapter 13
Also known as an adjustment plan, reorganization, or plan for wage earners, Chapter 13 bankruptcy allows people to pay off all or part of their debts. This alternative allows the debtor to generate a payment plan for three to five years.
Here we have a list with the important points:
- As a debtor, you propose a plan to pay your creditors in installments over 3 or 5 years.
- The duration is determined by a court based on your income.
- This bankruptcy option is for people with a certain level of income or assets.
- In this repayment period the creditors cannot continue with the collection.
- The payment plan is based on mandatory court budgets that follow IRS guidelines.
Note: If you want to learn more about the requirements and implications of Chapter 13 bankruptcy, you can review our article. See also the differences between Chapter 7 and 13 Bankruptcy. You can also review bankruptcy Chapter 11 which is for businesses.
You should be aware that any bankruptcy filing will have at least two general consequences:
- Filing for bankruptcy can be tough on your credit, at least in terms of your score. And after filing for bankruptcy, your credit reports may be limited to a score range of 300 to 800.
- A bankruptcy can stay on your credit reports for up to 10 years after the filing date. But Chapter 13 bankruptcies can leave your credit reports after seven years if you have completed the payment plan.
Note: Do you want to know all the implications of a bankruptcy? Here you can review the detail in our article on the consequences of filing for bankruptcy in the United States. And also, check out our specific articles on How to Buy a Home After Bankruptcy, Can I Buy a Car After Bankruptcy, Can I Refinance My Home After Bankruptcy, and If I File Bankruptcy I Lose My Car.
Credit score decline
After filing for bankruptcy, generally the consequences for your credit score are as follows:
- Bankruptcy will lower your credit score.
- Your past debt history will not be erased even when the debt is canceled.
- You will become a risky borrower, so you can get high interest rates when trying to apply for new loans.
It may seem that there are only negative consequences if we think about the decrease in the credit score, and how that may affect you when you request new loans. But while bankruptcy does affect your credit score, don’t forget that it helps you recover from your mounting debt. That is, affecting your score may be the best for you, if it improves your financial situation inn the long term.
How to get a personal loan after bankruptcy
We recommend preparing to apply for a personal loan after bankruptcy. Here are some steps to follow:
- You must first know the status of your credit score. Then you must request an official credit report. You can request it for free on the AnnualReport.com website.
- To be completely sure, you should request the report from the three largest credit reporting agencies, which are Equifax, Experian, and TransUnion.
- After a Chapter 7 bankruptcy, your debts must be listed and show a zero balance. Double check that your Chapter 13 debt accounts are being reported correctly, now that you are paying as agreed.
- Then you will need to be able to prove your income when submitting the loan application. Pay stubs, W-2 forms, and other documents can show that you have enough income for the loan, even if you are bankrupt. Try to include secondary income or your spouse’s income in the calculation, so lenders see it as less risky.
- Prepare an explanation: You can prepare a letter explaining the circumstances that led to the bankruptcy and how you are solving the problem. If your bankruptcy was caused by medical costs or some other unforeseen problem, that may be considered in the evaluation of granting you a new loan.
- Compare the business terms and conditions of various lenders. Search online for the best personal loan providers and see what terms they offer you. You may not qualify for the best rates, but you can still get something affordable. Compare offers online with those that may be available at your bank or local credit union.
It is very likely that after requesting your credit score reports, you will see that you are affected by bankruptcy. A low score limits your chances of getting a loan, but it is not impossible.
How to improve my credit score in the United States
After bankruptcy, your credit score was damaged and lowered. Now is the time to take action to begin the process of improving it. You are on the right track, taking control of your financial status. Our expert Estate Planning attorneys can advise you.
Your proactivity will be rewarded and reflected in your score. But don’t forget that this is a process that will take time. Here are some tips to increase your credit score as quickly as possible:
- Pay your creditors on time: Debts pile up and snowball into an amount that is quickly difficult to control. Don’t wait to get there again.
- Schedule your payments: Using this measure, your payments will be automatically deducted from your bank account. This way you won’t be tempted to spend the money on another item. Using this mechanism also has the benefit of ensuring that you will make payments before the due date.
- Improve your credit utilization rate. It is not advisable to use more than 30% of your credit capacity. So if you have a quota of $ 10,000, you shouldn’t use more than $ 3,000 of credit. This will ensure you maintain a better credit score.
- Increase your credit limit. In line with the previous point, an increase in the credit limit (while maintaining the current utilization) will automatically decrease the rate.
- Do not close your Credit Card accounts. Maintaining active Credit Card accounts, even if they are unused, increase your creditworthiness and, therefore, help improve your Credit utilization rate.
- Use inactive credit cards periodically. We explained above, you already know the importance of having a higher credit limit.
- Pay twice a month, or as often as possible. Try to pay off a part of the credit up front and the rest later. Thus, regardless of when the account is reported, it will be seen to have a lower credit utilization rate.
- Mix up your types of debt. It is advisable to have both installment and renewable credit accounts. Showing credit institutions that you can manage both responsibly will improve your credit score.
- Negotiate your outstanding balances. At Ortiz & Ortiz we have an expert team of business lawyers who will be able to accompany you in this negotiation process with your creditors.
- Dispute the errors in the Credit Report. Along the same lines as the previous point, if your report shows debts that are not yours, our lawyers can help you. If you find an error, you can dispute it, and if your creditor cannot back it up, it will be completely removed from your credit report.
It is possible to improve your credit score and we show you how in our article How to raise your credit score fast in the USA.
How to Apply for a Personal Loan After Bankruptcy: Step by Step
Let’s think positive. If your credit score and income level allow you to access a post-bankruptcy personal loan, this means you are on the right track financially. Below we will review a simple step-by-step of the loan application process.
- Prequalification for your personal loan: Prequalifying for a personal loan with various lenders will allow you to compare potential offers. You will receive an estimated annual effective rate, which is a better measure than interest rates because it takes into account loan fees a lender may have. You should also check to see if each lender charges an initial fee.
- Decide how much money you need to borrow: Before applying for a personal loan, calculate the amount you really need to borrow. You can use a personal loan calculator to estimate how much your monthly loan payments will be.
- Apply for your personal loan: If you have already found the lender, and you agree with the commercial conditions they offer you, apply for your loan in person or online. The lender will ask you to provide personal information, such as your income, address, and social security number (SSN). If you plan to apply in person, please call ahead to find out the required documents you must bring to verify your income or residency.
- Review and sign the loan contract: This point is essential. If the lender approves your loan application, they will send you a loan agreement for your review. Don’t skimp on a rigorous review of the contract. We recommend that you reevaluate the amount requested, and if it is really necessary for your financial planning, ask for the money. If your answer is still yes, you just have to sign it. After that, you will receive your funds.
- Pay off your personal loan: It seems obvious, but it doesn’t hurt to remind you how to protect your already damaged credit score. Make sure to pay off your personal loan in fixed monthly installments. Some lenders offer discounted fees if you sign up for automatic payment. Also, automatic payment will ensure that you never miss a payment and thus increase your credit score.
Alternatives to personal loans for people in bankruptcy
If you have already tried the steps to qualify for a personal loan after bankruptcy and it did not go well or if you want a lower interest rate, consider the following options for borrowing money:
- Secured Credit Cards: The difference from a regular credit card is that secured credit cards require a refundable cash deposit. Instead of having a credit limit that is based on your creditworthiness, your provider bases its limit on the amount of money you deposit in a collateral account. Like other forms of secured debt, the lender can seize your cash deposit if you fail to pay the amount that you borrowed. This ensures that you have control over your debt.
If you need to rebuild your credit after bankruptcy, this is a good option. As we discussed earlier in this article, making payments on time can improve your credit score, helping you qualify for future loans.
- Home Equity Line of Credit: A home equity line of credit allows you to borrow money as needed from your home’s equity. At the beginning of the loan, there is a withdrawal period in which you are only responsible for making the interest payments. At the end of the withdrawal period, the repayment period begins. You are responsible for paying principal and interest balances during this time.
To qualify as eligible, lenders require you to have between 15% and 20% of your home’s equity. Because your home secures your line of credit, lenders can generally offer lower interest rates.
If you can secure a lower interest rate, this may be a better option than a personal loan. However, keep in mind that in the event of a loan default, the lender may foreclose on your home.
- Co-signer Loans: One way you can justify higher income and improve your chances of being eligible for a personal loan after bankruptcy is to find a co-signer. Having a co-signer with a good to excellent credit score will surely increase your chances of being approved for a personal loan. You may also be able to get a lower interest rate than you would without a co-signer.
Co-signers -or guarantors are not responsible for monthly payments. This is unless you fall behind in payments or default on your loan. This also means that any negative payment activity can affect your credit score.
Why Hire The Attorneys At Ortiz & Ortiz?
Recovering financially after filing for bankruptcy is not an easy process. But you are not alone: At Ortiz & Ortiz we want to help you and, therefore, we have a team of specialist lawyers with more than 30 years of debt relief experience. In addition, on our website, we have multiple blogs about debts, bankruptcy and its consequences and other derived topics.
Contact Us! Our bankruptcy attorneys will review your case, and after discussing your options, they can help you:
- Discover and calculate your total debts.
- Know what your credit situation is.
- Discover the best measures to resolve your debt status
- In the process of rebuilding your credit.
- In your relationship with lenders and collection agencies so that all your creditors treat you fairly.
- Advise on whether or not it is convenient for you to file bankruptcy and under which chapter to do so.
- Guide you through the steps involved in filing for bankruptcy.
Our mission is to help you resolve any questions, both legal and financial difficulties that you may be facing. Our practice areas at Ortiz & Ortiz range from Business and Commercial Law, through Estate Planning, and even Bankruptcy.
Don’t hesitate and contact us! We are waiting for it.