How to file bankruptcy and still get a loan
Every day, more than 6,000 American households file for bankruptcy. That’s right, 6,000.
According to an article earlier this month on CreditCards.com, more than 6,200 bankruptcy filings occurred every single day in February, and almost 6,900 bankruptcies were declared every day in March. At least one expert believes we’re on track to have 1.5 million bankruptcies this year, which would just beat the 1.4 million bankruptcies we had last year.
I bring up these numbers because one of my WalletPop editors recently read a short item in the Los Angeles Times about how difficult it can be to get a business loan after a bankruptcy and suggested I write a piece on how difficult it can be for people to get personal loans. I was happy to oblige. Like it or not, in part because of my own bankruptcy in 2008, I know more than I wish I knew about bad credit.
If you’re on the brink of bankruptcy, or are one of those 1.4 million people who declared bankruptcy last year, you might be interested to know the following.
Getting a mortgage, post bankruptcy.
There are no hard and fast rules here, according to Hale Walker, senior vice president of Port Huron, Michigan-based First Preferred Mortgage Company, a company that handles mortgages in 25 states. Walker says that if you’ve had a bankruptcy, it typically takes five years to get a conventional home loan and two years if you’re going for an FHA loan.
But it’s possible to get one sooner, if you aim for an unconventional loan, like a lease-option, where you rent a home while saving up the money for your down payment and biding your time until your credit score goes up. “It’s in situations like these where it really helps to sit down with somebody in this industry and start putting together a strategy,” Walker says. “If you have a willing buyer and a willing seller, you often don’t have to follow the same guidelines that you do with traditional lending.”
No matter which type of loan you seek, Walker says, “You’re doing the right thing by trying to get your act together. Bankruptcy can be such a traumatic experience that [some] people tend to hunker down and hide. If you were forced to go into bankruptcy, you really have to be proactive and get back in the game.”
Granted, that may mean you won’t be able to buy a house soon after you’ve declared bankruptcy, but as Walker says, you can start immediately taking steps to restore your credit, so you can buy a home — or a car — or be a probable candidate for a personal loan. A lot of people, says Walker, pay in cash. “They’re embarrassed by their bankruptcy,” he explains, “so they make a solemn vow to themselves that they’re going to do nothing but pay cash, and they pay everything perfectly, but then they have no [credit] history.”
If you want to purchase a house in the aftermath of a bankruptcy, Walker recommends working to improve your credit score, either by getting a secured credit card (where you put your own money in the card, usually around $300) and then paying for bills that way, or at least — and this last approach is very sound for the credit card-shy person — paying by check and keeping extensive records of every bill you pay. If you document everything for, say, a year, then you’ll have a much better shot at getting a loan from a lender.
That’s because the way loan approvals are given has changed, says Walker. For years, computer algorithms tended to decide if people would get loans; as a result, many people who fit criteria in certain ways were getting approved for loans, even though they had no business getting that money. Now, says Walker, “lenders are going back to the old routine of common sense.”
One word of warning, though: Having the bankruptcy on your record may mean you’ll be paying a higher interest rate than someone who’s never been in the bankruptcy boat.
Getting a car loan, post bankruptcy.
Several months after my bankruptcy, smoke started coming out of the engine of my Saturn. I somehow managed to get it off the highway and coast into a garage, where the mechanics soon realized they couldn’t save my car and called the time of death. I hated the idea of buying a car and collecting a new debt, but the long and short of it is, I was able to get financing to buy a fairly new car, a 2006 Subaru. And I’m self-employed. I suspect anyone with a steady income — and especially if you have a place of employment — will be able to get a car, even if your bankruptcy was yesterday. Granted, my story is just one example, but I’ve talked to enough experts over the past few years to come to this conclusion: Loans are tight, but the car industry, frankly, wants very much for you — and everyone under the sun — to buy a car. So they will do what they can to make a sale happen.
That is, again, if you have real proof of income and if you can stomach a higher interest rate than what the sticker and commercials are promising.
Getting a personal loan, post bankruptcy.
There are really no rules here. In some cases, you’ll find that you can get a loan — and I’m using the word “loan” loosely, meaning anything from a credit card to a student loan — pretty easily. In most cases, however, it’ll be a challenge. And if you’re requesting a loan from a company that lost money in your bankruptcy, you can pretty much forget about getting a loan for some time to come.
But, as Walker said, the worst thing you could do at this point is to hunker down and hide. A bankruptcy, depending what type you declare (Chapter 7, 11 or 13), will stay on your credit report for seven to 10 years. But with every passing day, as you start restoring your credit, that bankruptcy becomes a little less significant.
“And if you’re working on your credit and can show lenders you’ve been paying your bills, they might be able to put together a package that makes sense,” says Walker. “You’re going to have much better luck if you pay your bills and live your life than if you do nothing and just wait for a magical two years to have passed and then start trying to get a loan.”