A question we often hear from people considering bankruptcy and from clients who have filed for protection from creditors is whether they will have any access to credit after a bankruptcy. Can you get a loan while in bankruptcy? Will you be able to get a car loan or qualify for a mortgage to buy a house or simply get a credit card?
Bankruptcy offers people who cannot pay their debts an opportunity to get a fresh start. Nearly 790,000 individuals and businesses filed for bankruptcy in 2017, according to the Administrative Office of the U.S. Courts. Many more are working through the bankruptcy process. Most will have access to credit again.
Fortunately, many individuals who go through bankruptcy do re-establish their creditworthiness and have access to credit again within one to three years. Rebuilding your credit is a process that takes time and financial discipline. To start, you may want to consider getting a secured credit card if you are having difficulty get approved for an unsecured credit card. Keeping the credit card account payments current is a good way to start re-establishing your credit score and repairing your credit history.
Applying for Loans After Bankruptcy
When you apply for new credit after a bankruptcy, you should expect that banks and other lenders will review your credit history and take into consideration your bankruptcy. Whether it is a Chapter 7 bankruptcy or Chapter 13 bankruptcy, the bankruptcy filing will most likely have an adverse effect on a person’s credit scores.
Lenders view consumers with a bankruptcy history as presenting a much higher risk of defaulting on a loan or not meeting their agreed obligations. That perceived higher credit risk makes it more expensive for you to borrow money. You may be charged a higher interest rate on a personal loan or an auto loan after a bankruptcy.
How Bankruptcy Affects Credit
A recent study by Lending Tree, an online marketplace for consumer loans, on the cost of bankruptcy shed some interesting light on the topic. Researchers at Lending Tree compared the types of automobile, mortgage and personal loans received by consumers who had declared bankruptcy in the last seven years and the loans extended to those who did not have bankruptcies on their credit file.
Among the interesting findings, the researchers said that within two years of a bankruptcy approximately 65 percent of people had a credit score of 640 or above. That score is generally considered the threshold at which consumers are eligible for a loan.
Within five years, three fourths of those with a bankruptcy had raised their credit scores to levels that made them eligible for loans.
The study found that a typical $15,000 auto loan incurred an extra $2,200 in borrowing costs for consumers seeking loans with a year of the bankruptcy, but only $800 more for those who waited two years.
The Lending Tree study indicated that borrowers who applied for a mortgage three years after filing for bankruptcy were offered home loans with interest rates that were about 20 basis points higher that consumers who did not have a bankruptcy. The higher the annual percentage rate, the higher your borrowing costs are.
You may want to consider postponing a home purchase for a year or two longer and concentrating on raising your credit score. A higher credit score can save you thousands of dollars in financing costs in the long run by allowing you to get more favorable loan terms.
The study shows that with hard work and a disciplined approach, you can repair your credit score and regain your financial footing within one to three years of a bankruptcy filing.
How Time Can Be Your Friend After Bankruptcy
If you file for bankruptcy, it will remain on your credit history for a number of years. The type of bankruptcy you select will determine how long it will appear on your consumer credit report. Chapter 7 and Chapter 11 bankruptcies will remain on your credit report for 10 years after you file. Chapter 13 bankruptcy will remain on your credit report for seven years after the bankruptcy is filed.
As the years pass, the effect of the bankruptcy on your credit score will gradually diminish if you take a disciplined approach to paying your creditors, paying bills on time and maintaining a manageable level of debt on credit cards and other revolving credit. Here are some more tips to improving your credit score.
If you pay your bills every month and do not miss scheduled payments, you will be adding positive chapters to your credit history and showing that you can handle credit responsibly. Over time, your positive steps and responsible behavior will restore lenders’ confidence in your ability to handle credit. If you take the steps to rebuild your credit, you should be able to get a loan while a bankruptcy is on your credit report.
Contact N.C. Bankruptcy Attorneys Serving Raleigh, Cary and the Triangle
At Sasser Law, our board-certified bankruptcy attorneys have helped thousands of North Carolina residents develop plans to work through financial hardship and start rebuilding their credit. Every individual has specific factors that led to his or her financial distress. Our attorneys will sit down with you and find the best options to move forward based on your individual circumstances. Our goal is to help you or your business take the steps necessary to relieve your financial stress and get back on sound footing. If you are considering bankruptcy and have questions about obtaining credit after bankruptcy, contact a board-certified attorney at Sasser Law for a free consultation. We can help you evaluate whether bankruptcy is an appropriate option in your situation.