Unsecured Loans after Bankruptcy: What You Need to Know

Can consumers get unsecured loans after bankruptcy? The short answer is yes, though it may take some time and effort -- after all, bankruptcies do have a negative impact on credit ratings. Probably more difficult than getting approved for financing is finding a loan without super-expensive and burdensome terms. That will take some effort.

Getting an unsecured personal loan (and making all payments on time and in full) can help rebuild your credit after discharging a bankruptcy. The right planning and preparation before applying, so you can present the strongest application possible, may help you get a better deal on a post-bankruptcy loan.

The Good News

For many, access to credit after bankruptcy is less a problem than expected. A Federal Reserve study concluded that, "Ninety percent of individuals have access to some sort of credit within the 18 months after filing for bankruptcy, and 75% are given unsecured credit." In fact, for almost 20 percent of the group studied, access to credit increased after filing for bankruptcy – probably because once debts have been wiped out, a consumer's debt-to-income ratio, which is one of the factors lenders look at for credit applications, will be better than it was prior to the bankruptcy.

When to Apply for Unsecured Loans after Bankruptcy

Bankruptcies may stay on your credit report for up to ten years, but some lenders are willing to provide financing one day after a bankruptcy has been discharged. If you've filed a Chapter 7 bankruptcy (liquidation), all of your debts are forgiven -- you don't pay anything back, but the bankruptcy remains on your credit report for a decade. However, derogatory credit history including bankruptcy filing has of an impact on your credit score with every year that passes.

If you've filed a Chapter 13 (reorganization) bankruptcy, you'll be repaying some or all of your debts, probably over a five year period. A Chapter 13 bankruptcy is considered less damaging and shows on your credit report for seven years. You are allowed to apply for credit while still in a Chapter 13 reorganization.

How to Prepare Your Application

Preparing to apply for credit after bankruptcy involves some record-gathering and perhaps explaining how you ended up in bankruptcy, what you have done about it and why it won't happen again.

  • Request copies of your credit report from all three credit reporting agencies; Equifax, Experian, and Transunion. Check each carefully to make sure that they're accurate and up-to-date, reflecting your current borrowing situation.
  • If you are in a Chapter 13 bankruptcy, this will include debt that you're paying off as part of your bankruptcy schedule. If you filed Chapter 7, check to make sure that each account on your credit report was included in your bankruptcy and shows a zero balance on the report.
  • In addition to your credit check, your loan application will require details about your current income, to show that you can in fact afford to make payments on this loan, so have the information handy before you begin.

Rebuilding Credit with an Unsecured Loan

While rebuilding your credit, there are a few points to keep in mind. Lenders that target consumers fresh out of bankruptcy do it for a couple of reasons – first, you won't be allowed to file again for many years, so the lender can be reasonably confident that if you have the income to make the payment, you will repay your loan. Second, lenders that focus on the newly-bankrupt know that these borrowers are grateful to be approved for anything and are less likely to be picky about their terms. According to the Fed, "In credit card industry parlance these individuals are referred as "cash cows" because they generate high income and profit margins, usually from high interest rates and fee income…"

  • Personal loans for bad credit situations, such as applicants who've declared bankruptcy, will likely come with a higher interest rate and fees. Double check and know exactly what those fees are – in many cases, fees that look like reasonable annual charges are actually highly-expensive monthly charges.
  • If you're turned down for an unsecured personal loan, consider applying for a secured credit card. Secured credit cards require borrowers to deposit an amount equal to some or all of their credit limit. These offers need to be carefully evaluated; they can come with fees that are ridiculous when compared to the credit limit (the most abusive cards are called "fee-harvesters" by consumer advocates). Paying for a secured card is only worth doing if the issuer reports your payment history to Experian, Equifax and TransUnion.
  • Unsecured personal loans for people with bankruptcies may be offered by banks, credit unions, and online lenders including peer-to-peer lenders, and repaying one of these loans as agreed upon can be a useful tool to rebuilding your credit after bankruptcy.

Post-bankruptcy credit might not be as difficult to find as you expect. However, there are reasonable deals and there are ridiculous deals. The best way to know you're getting something reasonable is to compare a batch of offers from competitive lenders and choose the best deal you find.

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