A personal loan after bankruptcy: Is it possible?

At some point, you might need to take out a personal loan — maybe to maintain or repair your home or car. Getting a personal loan after bankruptcy may be difficult, but it’s not necessarily impossible. Some lenders offer no-credit-check loans, but those often have ultra-high interest rates or fees that can lead to a debt trap.

Bankruptcy might have wiped out some of your debt or allowed you to get on a more-affordable monthly payment plan with your creditors, and it’s sometimes the best financial option available. But you may still have debts to pay, like student loans or tax debt, and your daily bills will still be due.

• Bankruptcy and your credit
• Is a personal loan possible after declaring bankruptcy?
• Watch out for loans with ultra-high rates or fees

Bankruptcy and your credit

Chapter 7 or Chapter 13 bankruptcy are the two types of bankruptcy people most often file to deal with their unsecured consumer debt, like credit card debt or personal loans.

• Chapter 7 bankruptcy — also known as a liquidation — can wipe out many of your unsecured debts, although an appointed trustee may have to sell your nonexempt property to help pay off as much debt as possible. Property that may be exempted from a bankruptcy sale can include vehicles, basic household furnishings and tools you need for work.
• Chapter 13 bankruptcy — also known as an adjustment plan or wage-earner plan — won’t wipe out your debt. Instead, you may be able to repay a smaller amount of debt with a three- to five-year payment plan. Filing Chapter 13 bankruptcy may allow you to keep some property, like a house.

Declaring bankruptcy can be tough on your credit, at least in terms of scoring. And after filing for bankruptcy, your credit reports may be limited to a score range of 300 to 800.

How long does a bankruptcy stay on your credit reports? The record can remain for 10 years after the filing date. But Chapter 13 bankruptcies may drop off your credit reports after seven years if you’ve completed the payment plan.

If you were behind on payments before you declared bankruptcy, an account may drop off your credit reports seven years after the first late payment that led to a default (or discharge via bankruptcy). This means some of your discharged accounts might drop off before the bankruptcy.

Is a personal loan possible after declaring bankruptcy?

Following a bankruptcy, your credit scores could fall below a lender’s minimum score requirements for loan approval. And even if your credit recovers, lenders may be able to see the bankruptcy on your credit reports for up to 10 years, depending on the type of bankruptcy you filed.

If you do get approved for a personal loan after filing for bankruptcy, you may face less-than-favorable loan terms and pay relatively high interest rates, too.

Your chances of getting approved for a personal loan might also increase the longer it’s been since you declared bankruptcy, since its impact on your credit scores can diminish. You may be able to help the process along by taking out a credit-builder loan or secured credit card — both are designed to help people build or rebuild credit by allowing them to build a positive payment history.

Comparing lenders may be especially important as you look for a personal loan, and you may want to start with credit unions, community banks and online lenders. Some of these organizations may focus on smaller personal loans or low-credit borrowers.

Another option may be to ask a friend or family member with good credit to co-sign your loan. While this option can make the other person responsible for the debt and could even challenge some personal relationships, it may be one of the few ways to qualify for a decent rate or large loan amount.

Watch out for loans with ultra-high rates or fees

When you’re looking for a loan with poor credit, you may have some options, but not all of them will be good ones.

Some lenders promise loans without a credit check and guarantee approval and immediate payouts, regardless of your payment history. But these loans typically come with higher interest rates, costs and risks than traditional personal loans. “No credit check” loans may have high fees or a high annual percentage rate, or APR, and you could wind up with new debt that you can’t afford to repay.

These types of lenders may advertise or offer …

• No credit checks
• Payday loans
• High-APR installment loans
• High-APR lines of credit

These lenders won’t always advertise the APR for the loans they offer. Instead, they may charge flat-rate fees that can make it difficult to compare your options. So you might find that you’re paying the equivalent of triple-digit APRs — as high as 400% in some cases. In contrast, the average credit card APR in February 2023 was 20.09%, according to Federal Reserve data.

While you may be able to get approved for one of these loans, you might have difficulty repaying the loan on top of your other bills. You could find yourself deeper in debt, and behind on bills — which can hurt your credit. And keep in mind that you won’t be able to declare bankruptcy again, because there’s a required eight-year waiting period for Chapter 7 bankruptcies (it’s two years for Chapter 13).

Bottom line

Declaring bankruptcy may be the best option in some situations, but it will also hurt your credit for years to come. If you need a personal loan after bankruptcy, you may have to accept a higher rate or find a co-signer. If you can wait and focus on building your credit before applying for a loan, that may be the better option.