If You’ve Filed for Bankruptcy, Can You Still Get a Loan?

Filing for bankruptcy certainly does a number on one’s credit. A bankruptcy can make it exceedingly difficult to borrow for years afterward. However, bankruptcy is not the financial death sentence so many people think it is. You can actually still get a loan if you know what to do and where to look.

This post explains some of the details of getting a loan after bankruptcy. It is still far better to avoid bankruptcy altogether but know that you do have borrowing options even if you have already filed.

 

Two Kinds of Bankruptcies

 

The first thing to know is that there are two kinds of bankruptcies for individuals. The first is Chapter 7, a type of bankruptcy that completely eliminates some kinds of debts and gives the filer a clean start. Note that not all debts are completely eliminated. Some, like mortgages and child support payments, must still be paid.

The other type of bankruptcy is Chapter 13. This is a re-organization of one’s finances more than anything else. Under Chapter 13, the court relieves the filer from having to deal with creditors while giving him/her time to reorganize his/her finances and establish a repayment plan for all outstanding debt.

Why mention the two types of bankruptcies? Because lenders look at them differently. Depending on a borrower’s filing, combined with other circumstances, a lender may or may not approve a loan application.

 

Loan Rates and Terms

 

While getting a loan following a bankruptcy is possible, borrowers should expect higher interest rates and less favorable terms. This is due primarily to risk.

Lenders must always evaluate risk when approving loans and establishing rates and terms. The higher the risk on the lender’s part, the more unfavorable rates and terms are to the borrower. And because bankruptcy signals risk, borrowers with bankruptcies on their records tend to get the least favorable rates and terms.

 

Proving Income Following a Bankruptcy

 

One of the limitations of going to a bank for a loan following a bankruptcy is proving one’s income. Banks are already in a position of having to scrutinize proof of income more closely than they did prior to the Great Recession of 2008 and beyond. That responsibility is even greater when dealing with a borrower who has a bankruptcy on his/her record. Banks will require that borrower to furnish every shred of evidence that his/her income can support borrowing.

Banks will also scrutinize every single detail of the borrower’s credit history and report. Every ‘I’ must be dotted, and every ‘T’ must be crossed to satisfy bank loan officers. Therefore, it behooves borrowers to check their credit reports on a regular basis. If there are any inaccuracies, correcting them is important.

 

Getting a Hard Money Loan

 

Borrowers attempting to get a loan following bankruptcy can turn to hard money lenders instead of traditional banks. Hard money tends to be the best option in the years following a bankruptcy for the simple fact that it is easier to get. Hard money lenders base their decisions on the strength of offered collateral rather than credit reports, income-to-debt ratios, and the like.

Hard money lenders also make approval decisions faster. Where it can take banks weeks to determine whether or not to approve a loan, hard money lenders can reach a decision in a matter of days. For someone with a bankruptcy on his/her record, speed could be the deciding factor.

Filing for bankruptcy is serious, but it’s not the end of the world. It is possible to get your finances in order, and even borrow, in the years following a bankruptcy filing.