Loans After Bankruptcy

Loans After Bankruptcy

Written by Chrissy Kapralos
Fact-checked by Caitlin Wood
Last Updated June 8, 2021

One of the common concerns that people have when considering pursuing personal bankruptcy is whether they will be able to get approved for a new loan in the future. In fact, many people put off bankruptcy when it is their best option out of concern for this issue, but the truth is often just the opposite. While there is a lull in the ability to get approved for loans and credit in the immediate aftermath of bankruptcy, lenders are more than willing to lend money to people who have declared bankruptcy or have been discharged from bankruptcy in the past

Why would a lender give money to someone who had to declare bankruptcy to get out of previous financial struggles? There are three primary reasons, including the ability of a lender to garner more favourable terms. The lack of debt load for the recently bankrupt, and the consumer’s improvement in financial responsibility post-bankruptcy.

Can You Get a Loan After Bankruptcy?

Getting approval for a loan requires a lot of research, documentation, and decent credit history. Add bankruptcy to the mix, and finding approval for a loan becomes even more difficult, as you will have a harder time qualifying. Experts recommend that you wait to build back your credit after bankruptcy before applying for a loan. Failure to wait can result in higher interest rates and overall unattractive loan terms. Banks will be unlikely to lend to you, but you may have some luck with private lenders, who may accept you as a risky client in exchange for skyrocketed interest rates.  

How to Get More Favourable Loan Terms? 

Even if you do receive approval for a loan after bankruptcy, it’s almost a guarantee that the terms will not be favourable. You might be faced with high-interest rates, increased penalties for late payments, and a short-term length. Here are some ways to obtain more favourable loan terms after bankruptcy:

Rebuild Your Credit

Building back your credit after bankruptcy takes time, but it’s not impossible. 

Get a Secured Credit Card

After bankruptcy, it’s unlikely that you’ll be approved for an unsecured credit card. Secured credit cards function similarly to unsecured cards, but they require a security deposit. For example, if you put in a $1,000 security deposit on a secured credit card, you’ll be approved for a $1,000 credit limit. Secured credit card issuers are not as concerned with your credit score when approving you as the debt is backed up by your security deposit. As you make purchases and timely payments on the card, your credit history is reported to the credit bureaus, helping you build back some of your credit. 

Credit Builder Loan

Credit builder loans are loans that function to improve your credit. Suitable for those with bad credit, or those with no credit history like newcomers, credit builder loans help you increase your credit score with the goal of making you eligible for more credit cards and loans. Requirements are minimal for these loans, as lenders only want to see that you have enough income to support your monthly payments. 

A credit builder loan requires you to open up a bank account and make monthly payments into that account on time. These payments are deposited every month until the term length is complete, which can range from 6-24 months. Lenders still charge you interest and fees, however. 

At the end of the term, you receive all of your money back (minus any fees charged), and your monthly payments are reported to the credit bureaus. With credit builder loans, it’s best to keep your monthly payments exact, and not go over. Your goal is to have a solid history of monthly payments for the credit bureau, and paying off the loan in full, or faster, defeats your purpose. 

Check out these credit building services in Canada.

Debt Load

Some people who declare bankruptcy are able to have their debt discharged, though that is not necessarily the case for everyone. Whether or not someone’s debt is discharged (forgiven) or simply restructured depends on a host of factors, such as the person’s ability to repay and the amount of debt. In either case, the monthly payment and debt responsibility for someone who declared bankruptcy in the previous two to five years is much less than before the declaration. That means that lenders are more likely to receive their full payment on time each month because the lender is not competing with others to whom the person owes money. The chances of getting repaid then become much higher, making someone with a bankruptcy on his or her record a more desirable customer.

Time 

Time is your friend when it comes to financially recovering from bankruptcy. Building credit doesn’t happen overnight – a steady history of repaying debts will help you build back your credit. Additionally, the older your bankruptcy date is, the better. If a few years have passed since the bankruptcy (as opposed to a few weeks), you may seem more reliable to a lender. 

Where Can You Get a Loan After Bankruptcy?

Bank loans are likely unattainable after a bankruptcy. If you want to secure a loan, you are most likely going to have to rely on alternative lenders. 

Alternative lenders are private, and not associated with traditional banks. They can either be a business, an independent person lending, or a fintech (financial technology) company offering lending services online. While banks place a lot of emphasis on your credit score in assessing your reliability, alternative lenders balance their approval on other factors, including income, job stability, capital, and debt to income ratio when deciding whether or not they want to lend to you. 

Keep in mind, however, that alternative lenders offer loans that have higher interest rates to offset the risk of a borrower with unfavourable credit. 

How to Get a Loan After Bankruptcy?

Credit Cards 

As discussed above, a secured credit card is a great way to get your feet wet with credit after bankruptcy. After enough time has passed and you have a solid number of payments that have been recorded with the credit bureau, you might begin to consider unsecured credit cards. Make sure you start off small and only take out enough credit that you can financially manage. You want to avoid going backward in your credit-building journey – racking up more debt on your credit card will only hold you back from bankruptcy recovery. 

Learn how to switch from a secured credit card to a regular credit card.

Mortgage

Getting a mortgage after bankruptcy can be difficult. Luckily, there are a few factors that lenders consider that may persuade them into lending you a mortgage:

Bankruptcy Discharged For at Least Two Years

Bankruptcy discharge occurs when the borrower in question has been legally released from their debt obligations, with a couple of exceptions. You are automatically discharged from bankruptcy nine months after filing, provided that the following criteria are met:

  • This was your first bankruptcy
  • You’ve attended two financial counselling sessions, standardized by the Office of the Superintendent of Bankruptcy
  • No creditors are opposing the discharge

Most mortgage lenders will want to see that at least 2 years have passed since you were discharged from bankruptcy. 

Check out what documents you’ll need to get a mortgage.

Access to New Credit

You’ll want to show that other lenders have approved credit in your name. This can be a variety of loans, including a car loan, unsecured or secured credit card. A lender is more likely to give you a mortgage if they can see you already managing new credit responsibly. 

Better Credit Score

Mortgage lenders will need to see an improved credit score since you filed for bankruptcy. 

High Down Payment

Since your bankruptcy poses more risk for a lender to give you a loan, it would help to have a higher than usual down payment for your property

Personal Loans

Like a mortgage, it will be harder for you to be approved for a personal loan after bankruptcy. Your best bet for a lender would be an alternative lender, who will look past poor credit in exchange for any of the following conditions on the loan:

Car Loan

Car loans are relatively attainable after a bankruptcy, as many dealerships provide financing to people with less-than-stellar credit, some of which resulting from bankruptcy. You’ll need to accept, however, that your term and interest rates will be different than what you would have been offered pre-bankruptcy. Be prepared to face higher interest rates with your car loan, but don’t fret – after you spend some time building your credit, you’ll likely be able to refinance your car loan

Bankruptcy FAQs

How long will bankruptcy remain on my credit report? 

Bankruptcy will remain on your credit report for 6-7 years, with the exception of a few provinces. If you’ve had more than one bankruptcy, however, it will stay on your credit report for 14 years. 

Can I get a mortgage after bankruptcy?

Obtaining a mortgage after bankruptcy is difficult but not impossible. You’ll need to give yourself time to build back your credit. Mortgage lenders will also assess your income, loan-to-value ratio in the property, condition of the property, and your assets. 

What’s a good secured credit card?

There are several secured credit cards that can help consumers looking to rebuild their credit after bankruptcy. Depending on your financial situation, you should consider any of these secured credit cards.

Gaining Perspective on Debt

While there are consumers who go through bankruptcy and seem to learn little, there are others who do gain perspective on their financial problems. Some may learn how to budget better or even get professional advice on avoiding financial problems in the future. These steps mean that people who have declared bankruptcy often become more responsible, a win-win for the borrower and lender.

If you’ve recently been discharged from bankruptcy and are looking to apply for a loan, Loans Canada can match you with a lender who can help you.


Rating of 4/5 based on 17 votes.

Chrissy is a Toronto-based communications advisor. With an English degree from the University of Toronto and editing courses under her belt from Ryerson University, she has continued her lifelong passion for writing and editing. In addition to working for Loans Canada on a variety of financial topics, Chrissy has a few years of resume writing and editing under her belt, and takes great pleasure in helping people find work that fits with their experience and passions. When she isn't working, you can find her practicing yoga, hanging out with her dog, reading up on financial and real estate news, or planning her next trip abroad.

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