While it may be true that bankruptcy offers some measure of immediate debt relief for those who are unable to pay their bills, there are some consequences that will remain with you for years to come. One of those consequences is an inability to obtain future credit easily. When you stop and think about it, this is for good reason. Banks and other lenders consider you an extremely high risk when they see a bankruptcy on your credit history. They are reluctant to loan you money because they don't want to be in the same boat as your previous creditors.
All that said it is still possible to obtain personal loans after bankruptcy if you know what you're doing. We'll explain how in this article. Before we do however, let's break the topic down into easily digestible bullet points. In order to obtain a personal loan after bankruptcy you should:
- wait at least six months from the time your bankruptcy is fully discharged.
- be ready to face very stiff terms.
- have sufficient disposable income to make payments regularly and on time.
- have a specific, verifiable use for a personal loan.
- be willing to be persistent in your pursuit of a personal loan.
The Six-Month Wait
The reason a six-month wait is suggested is to ensure that you do not go back to your previous spending habits as soon as your bankruptcy is discharged. If you can demonstrate six months of responsible financial management, including putting some money away in savings, you're more likely to be able to convince a lender to give you a personal loan. On the other hand, if you are down at your bank three days after your bankruptcy has been discharged, seeking a personal loan, they are likely to throw you out the door.
During your bankruptcy term you'll most likely use some of your disposable income to pay nondischargeable debts or to follow through on a Chapter 13 reorganization plan. One way to demonstrate good fiscal responsibility is to take that disposable income, once your bankruptcy has been discharged, and put it into a savings account. This shows a bank that you have changed your ways and know how to save money. Not only that, when you see money accumulating in a savings account it changes the way you think and encourages you to save more. That six-month post-bankruptcy waiting period is a good time to establish a habit of savings.
Stiff Terms for Personal Loans
With a bankruptcy as part of your credit history, be prepared that any personal loans you apply for will come with very stiff terms. For example, if the standard interest rate is 6%, you should plan on paying at least 10% to 12%. Don't argue about the terms; you're in no position to do so anyway. Just make sure before you sign the paperwork that you can afford your monthly payments. If you can, accept the terms and go on. This is the only way you're going to re-establish your credit.
Along with high interest rates, many personal loans for bankruptcy filers also include a default clause which demands full payment if you miss a single monthly payment. Loans that don't have such a stringent default clause may instead inflict punitive interest rates if a payment is late or missed. Again, you're in no position to argue the terms. Simply find the loan with the best terms possible and get on with it.
Sufficient Disposable Income
In order to pay off a personal loan you must have sufficient disposable income not being used to pay your daily expenses. By daily expenses we mean your food, rent or mortgage, utilities, gas and car insurance, etc. If you take out a personal loan without sufficient disposable income you will most likely wind up right back in the same position you were in prior to your bankruptcy. Your bank knows this, and will require you to prove you have sufficient income. Don't try to fudge the numbers if it's too close. Just accept the fact that you're not ready for a personal loan and wait until your disposable income is sufficient.
Have a Specific Purpose for Your Loan
Banks are normally wary of individuals who request a personal loan without demonstrating a specific purpose for it. If you have a bankruptcy on your record that suspicion will be even greater. So, before you even go to see a loan officer, decide on a purpose for the loan and be prepared to prove it.
A good example, and one that might increase your chances of getting a loan, is a specific home improvement. In other words, you may simply need a couple thousand dollars to replace a furnace. A personal loan is great for that kind of expense because it builds equity in your home and is not considered a consumable good or service. Banks love that sort of thing.
Be Persistent
Lastly, you may be turned down by the first bank or two you apply with. That's okay, don't give up so easily. You may have to make 5 to 10 applications before you find a lender willing to take a risk on you. Furthermore, don't get angry with the banks. They are simply trying to protect themselves from financial loss. You would do the same thing in their position.
The only caveat to being persistent is to be careful with whom you apply. There are unscrupulous lenders that know a thing or two about bankruptcy filers. For example, they know that these types of people tend to have a weakness when it comes to spending money. Some of these unscrupulous lenders are willing to lend money fairly loosely to former bankruptcy filers because they believe that such people will freely spend that money and then come back for another loan.
You can spot these types of lenders by reading the terms and conditions of the loan very carefully. If things seem vague or not well explained, that's an immediate red flag. You can also do an Internet search for scam reports on a specific lender. While these reports are not always completely accurate, they will give you a fairly good idea of what you're dealing with in a given lender.