When you file for bankruptcy, it begins a legal process that's directed by a bankruptcy court. There are two types of bankruptcy: Chapter 7 and Chapter 13. In both cases, the court appoints a trustee and creates a bankruptcy estate. In a Chapter 7 bankruptcy, the estate can sell off a portion of your assets to repay key debts while canceling the rest. In a Chapter 13 bankruptcy, you get to keep more of your assets, but you must follow a payment plan for up to five years before the remaining debt is canceled. It's possible to have a Chapter 13 bankruptcy but still get a loan.
A bankruptcy has various serious effects on your credit. It can lower your credit score by hundreds of points and can stay on your credit report for as many as 10 years. Lenders try to manage their risk as much as possible and hate to see defaulted loans and bankruptcies. This combined problem of a lowered credit score and the mark of a bankruptcy can make it very difficult for you to find loans while you're in bankruptcy. Difficult doesn't mean impossible, though. Certain loan options do remain open to you.
First consider the type of loan that you want. Lenders are more willing to give you smaller loans with shorter terms while you're in bankruptcy because the risk of defaulting is lower. Be prepared for higher interest rates, though: Lenders lower their own risk by charging you more for the loan. A large loan such as a mortgage is more difficult to obtain, so you may need to make payments on your bankruptcy plan for a couple of years before you can finance a home. A line of credit, on the other hand, may be more possible.
Lenders want to know the facts about your financial position. They request bankruptcy documents and statements about your current financial position, especially about your income. How much income you have determines what type of loan you qualify for. If most of your income is taken up with necessary expenses and the bankruptcy plan, you can try to refinance to pay off your bankruptcy early.
The bankruptcy court also has its own requirements when you get a loan. Whether you're trying for a separate loan or a refinance to pay off your debts early, the court must give approval. This helps the court ensure that you'll still be able to make your bankruptcy payments and satisfy the terms of the bankruptcy.
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