The dreaded word bankruptcy has carried a severely negative connotation for far too long. The truth is, hundreds of thousands of bankruptcies are filed by businesses and individuals each year, so don’t think you’re alone if you’ve had to make this difficult financial decision.
An unexpected medical emergency, job loss, or other significant event can put you too far behind on your finances to catch up. Financial hardships are a part of life, and bankruptcy is one of the tools available to help with them.
Creditors understand this, so the sooner you can show financial stability following a bankruptcy, the sooner you can begin borrowing money again. That includes getting a personal loan after bankruptcy.
Bankruptcy can feel like a fresh start
You can think of bankruptcy as a fresh start. Once your debt has been completely forgiven, you should feel a renewed sense of hope and freedom. Yes, things will be difficult for a while, but you can use this time to build healthy financial habits.
A bankruptcy will appear as a blemish on your credit report for up to a decade, but its significance will subside as time goes by and you rebuild your creditworthiness.
Initially, lenders, insurers, and other financial companies will be less likely to do business with you when you have a bankruptcy on your credit history reports. When they do, it often comes with strings attached, such as higher rates, origination fees, down payments, or the requirement of a well-qualified cosigner.
They may also insist that you use collateral to borrow the money. But with proper financial habits in place going forward, that will change.
Rebuilding your credit after bankruptcy
Improving your credit score after the discharge of a bankruptcy is a bit of a catch-22. To fully recover from bankruptcy and access the best personal loans, credit cards, mortgages, and other financial products, you must rebuild your credit first. At the same time, bankruptcy itself makes it difficult to do.
Before embarking on your credit-rebuilding journey, ensure you have regular employment or other stable income, and verify that your finances are in order before attempting to borrow money again.
Stay up-to-date with your payments, including your mortgage, student loan, auto loan, and any other financial obligations that weren’t discharged in the bankruptcy. Continue to pay your bills on time each month, as well as any new accounts that may arise.
Depending on the type of bankruptcy you filed, you won’t be able to file again for at least a couple of years, so let’s try to avoid going down that road altogether.
For the quickest results, you’ll want to obtain new credit as soon as possible. Initially, it won’t be easy, but there are options. Here are a few ways to get started.
Get a secured credit card to improve your score quickly
Before applying for a traditional personal loan, you’ll want to reestablish a positive credit history post-bankruptcy. Lenders need to know you can handle credit responsibly going forward. It will take some time, but once you have reestablished a history of on-time payments to creditors, your credit score will improve, and more companies will take you seriously.
One of the quickest ways to start rebuilding your credit is by applying for a secured credit card. These cards function like unsecured credit cards but usually come with smaller credit lines, fewer rewards, higher fees, and require a refundable security deposit of a few hundred dollars. They are primarily used for rebuilding credit and are one of the easiest items to get approved for.
I recommend obtaining a secured card with a low annual fee and using it to make purchases every month for at least six months, then paying off the balance at the end of each billing cycle. That way, it will show regular activity, and it won’t matter how high the annual percentage rate is because you won’t be charged interest by doing it this way.
If you can obtain one with no annual fee and a low APR, that’s even better. Scoring one with transactional rewards can also be beneficial.
The best secured credit cards will automatically graduate your account to an unsecured card with a higher credit limit and better terms after a few months or more of on-time payments. However, you may need to request better terms and a credit increase after some time has passed.
Generally, it takes at least a year of consistent on-time payments towards a secured credit card or other credit account following a bankruptcy before companies will consider you for a personal loan. At that point, you can start applying through online lending platforms such as Upstart, Upgrade, and Universal Credit, as they work with individuals who have less-than-perfect credit.
Companies like CreditNinja will be even easier to get approved for. However, the company only provides short-term personal loans of up to $5,000, which come with much higher interest rates and fees compared to most longer-term personal loan providers.
You can view details about many of these companies and compare other offers on our Low APR Personal Loans page.
Applying for personal loans
It will be easiest to get approved for something well within your budget. Consider starting with a small amount, such as a $2,500 personal loan, then paying it off quickly. Having an installment loan on your credit report, in addition to a revolving credit account, can significantly boost your score.
Then you can apply for something higher, such as a $4,000 personal loan, a $6,000 personal loan, or a larger amount.
Bad credit loan specialists
Even after you have partially rebuilt your credit, you may still find it challenging to acquire a personal loan. If you are having trouble getting approved through one of the lenders mentioned above, you could try working with a company that specializes in connecting people with bad credit loans.
You will likely find their offer disappointing, but it is nice when you locate a lender willing to assist you with your needs.
Short-Term loans
If you’re in a desperate situation and need to borrow a small amount of cash quickly, consider a short-term loan such as a cash advance or payday loan. These types of loans aren’t ideal, but they can be helpful in an emergency.
Before you proceed in this direction, however, consider obtaining a payroll advance and exploring other borrowing options, such as borrowing from friends and family, to avoid incurring astronomical fees.
Furthermore, cash advances and payday loans will likely not improve your credit score, but will surely harm it if you fail to repay the money.
Staying positive following bankruptcy
My final piece of advice is to stay positive. With the right attitude and good financial habits, anyone, given the opportunity, can rebuild their credit and receive a personal loan shortly after bankruptcy.
Also, stay patient and keep looking forward. Time heals all wounds, as they say. Understand that you may get rejected for new credit along the way, but you can choose to harness that rejection, learn from it, and propel yourself forward.
As long as you establish your creditworthiness and stay current with your monthly payments, you will regain access to personal loans and quality lines of credit. By being strategic and doing it responsibly, doors will open faster than you may think.