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How to Get a Personal Loan During or After Chapter 13 Bankruptcy

Updated on March 4, 2024


Obtaining a loan during bankruptcy is possible, but specific difficulties may arise.

When filing for Chapter 13 bankruptcy, individuals can reorganize and repay their debts over three to five years with court oversight. Once you pay off creditors, individuals may be eligible to apply for personal loans again, albeit with a significantly decreased credit score, potentially limiting them to lenders specializing in bad credit short-term loans.

It is possible to obtain a personal loan while in the repayment period for Chapter 13 bankruptcy, although it can be challenging. The regulations regarding this vary among states, and in most cases, obtaining court approval is necessary before securing any new credit, including a personal loan.

Is It Possible to Obtain a Personal Loan While in the Bankruptcy Process?

It may be challenging to get a personal loan while still repaying your Chapter 13 bankruptcy plan due to the regulations governing this form of bankruptcy.

Types of Bankruptcy

There are six different types of bankruptcy in the United States, including Chapters 7, 9, 11, 12, 13, and 15. Individuals typically use Chapters 7 and 13, while Chapter 11 is primarily for businesses. The remaining types have more specialized purposes.

Chapter 11 and Chapter 13 differ in terms of eligibility, cost, and the duration of the process. Chapter 13 is designed for individuals with steady incomes and specific debt limits. This form of bankruptcy filing involves a trustee who will allocate all income to creditors over three to five years.

Credit Score

Obtaining court approval for a new loan during your Chapter 13 repayment period presents a challenge due to the lasting impact of bankruptcy on your credit score. A Chapter 13 bankruptcy will remain on your credit report for seven years and substantially affect your credit score.

Your ability to qualify for a personal loan after bankruptcy can be challenging, as many top loan providers require a minimum credit score of 600. Suppose your credit score falls below this threshold. In that case, you will need to search for a lender specializing in working with individuals with poor credit.

Steps for Obtaining a Personal Loan While in Chapter 13

Steps for Obtaining a Personal Loan While in Chapter 13

Before seeking a loan in Chapter 13, you should know that your trustee court will only allow you to take on new debt for personal, family, or household purposes.

Suppose you require a dependable work vehicle to generate income for your Chapter 13 repayments. In that case, the court might consider approving a loan for you to acquire the necessary car.

In certain situations, the court can authorize the purchase of a new home, but only if the monthly mortgage payments are lower than the current rental expenses.

Getting Permission for Incurring New Debt in Chapter 13

To obtain a loan, you'll need permission from the court. The specific procedures for doing so may vary depending on the court. Therefore, it is advisable to consult with your bankruptcy attorney to ensure compliance. Additionally, you will typically be required to:

  • Obtain a sample financing statement from your personal loan lender that details the loan terms.
  • To apply for the Chapter 13 trustee loan, please complete the necessary paperwork on the trustee's website. These forms will require you to justify your loan request.
  • Please request the court's approval to borrow money and distribute it among your creditors, the trustee, the U.S. Trustee, and any other relevant parties.
  • You may need to attend a brief hearing in court. In certain situations, the court may decide to grant your motion without the need for a hearing.
  • If the court approves your motion, it is necessary to provide the lender with a copy of the court's order. The lender must review this before granting the loan.

Please be aware that the loan approval process is not guaranteed, and it may take a month or longer to complete before receiving approval.

While it may seem tempting to consider a payday loan during Chapter 13, it's important to note that it is classified as predatory lending and can potentially exacerbate your debt.

Options for Financing Besides a Personal Loan While Going through Chapter 13

The process for acquiring new debt during Chapter 13 remains consistent, regardless of the type of loan, whether it be a personal loan, peer-to-peer loan, or car loan. It is vital to inquire with your Chapter 13 attorney about the specific regulations set forth by the trustee before considering any loan applications.

When experiencing financial difficulties, consider renegotiating your Chapter 13 agreement instead of acquiring additional debt. The specific process for this decision depends on whether your problems are temporary or prolonged.

  • Suppose you are experiencing temporary challenges in making your Chapter 13 repayments. In that case, it is recommended that you discuss the situation with your Chapter 13 attorney. They can work with your Chapter 13 trustee to explore the possibility of deferring your payments for a few months.
  • If you face long-term difficulties, such as job loss, consulting an attorney may allow for modifications to your Chapter 13 plan, resulting in reduced payments. A court appearance will likely be required as part of the negotiation process.

Is It Possible to Obtain a Secured Credit Card While in Chapter 13?

Obtaining a secured credit card involves depositing funds upfront for your lines of credit. Make the monthly payment on time, and it will be a low-risk way to establish a positive credit history.

If you cannot obtain a credit card in your name, one option is to request to be added as an authorized user on someone else's credit card.

What Is the Waiting Period for a Car Loan After Chapter 13?

It is feasible to obtain an auto loan immediately after filing; however, it is crucial to be aware that traditional lenders will analyze your credit history more closely. Following bankruptcy, your credit score will significantly decrease, potentially resulting in higher interest rates or potential loan denials.

What Is the Typical Timeframe for Rebuilding Credit After Chapter 13?

A Chapter 13 bankruptcy remains on your credit report for seven years. Generally, your credit score takes 12 to 18 months to improve after your Chapter 13 is discharged. However, returning to your previous credit standing may take multiple years.

Can a Credit Score Increase During Chapter 13?

During Chapter 13 bankruptcy, one can rebuild one's credit score by making payments on time to one's bankruptcy plan. However, it is essential to note that repairing the adverse effects on your credit score may take several years.

Can I Pay Off Chapter 13 Early?

In most cases, the court will only permit early completion of Chapter 13 bankruptcy under two specified conditions.

  • All claims, including unsecured debts, can be fully paid.
  • It is possible to provide evidence of a financial hardship.

What is Bankruptcy?

Bankruptcy refers to the legal status of a person or some other entity with a corporate identity that cannot repay debts to creditors. Usually, a court order imposes bankruptcy, and the debtor often initiates it. It has a lot of consequences, particularly negative ones that may put the debtor in an unwanted condition.

Being bankrupt is not something anyone ever wants to experience. Nevertheless, regardless of who you are, how smart you may be, or how highly you think of yourself, you are never immune to it. Many people believe there is no hope once bankruptcy hits their paths and that their financial lives are dead and buried. However, this is only sometimes true. Suppose the proper steps are taken at the right time, and the circumstances are utilized prudently. In that case, bankruptcy may be a way for you to get a new start in your financial life.

The aftermath gives you the best opportunities to build your credit fast and reestablish a new, positive financial identity. One such way to reinvigorate your financial strength in this situation is through personal loans. The only thing that matters for you is understanding the basics to make obtaining quick personal loans and easy and pave the way for a proper economic recovery.

Therefore, we give you some essential tips for looking for a positive financial identity through loans after Chapter 7 or Chapter 13 bankruptcy.

Understand the Specifics of Bankruptcy

Before you secure a personal loan, it is essential to understand what bankruptcy purports and what entails its specifics. Generally, you can file for two forms of bankruptcy.

Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7 vs. Chapter 13 Bankruptcy

By filing for Chapter 7 bankruptcy, you are simply letting every one of your debts be discharged and extinguished. When you file for this form of bankruptcy, the liquidation of assets follows, and all proceeds thereof are distributed to your creditors.

This situation differs from what is obtainable under Chapter 13, which allows debt to be reorganized into a convenient repayment scheme that lasts three, four, or even five years. However, after a Chapter 7 bankruptcy filing, you must complete a Means Test to review your income and assets. Upon completing the test, A meeting is set up with your creditors. More often than not, a lender will want you to receive a discharge after you have met with your creditors before they will consider providing you with a loan. Suppose the meeting with your creditors is yet to be concluded. In that case, a car title lender has the discretionary power to deny you an auto title loan pending the conclusion.

On the other hand, by filing for Chapter 13 bankruptcies, you will have to get permission from your trustee before you can apply for a loan with a car title lender. The specifics of the Chapter 13 bankruptcy plan are structured in such a way to help you get out of your debt based on the amount of money currently owed. As a result, you must inform your trustees before you dip your head into another debt. They may need to set a particular limit or cap the interest rate on the amount you are allowed to borrow.

Talk to Your Attorney

Consulting a professional is vital to leading a successful post - bankruptcy life. Before you go for any personal loan, you must talk to your attorney or any person of such profession. No matter how intelligent or clever you may think you are, getting a loan after bankruptcy is one of the trickiest to navigate, and it often requires expertise. An expert's opinion will do a lot of good in helping you sail through the situation comfortably.

Consider High-interest and Secured Loans

While you shouldn't jump on the first loan offer that comes your way after bankruptcy, you should be open to the eventual possibility of accepting post bankruptcy personal loans that comes with high interest sooner or later. The crucial thing is for you to make the best possible of your financial situation in the unfavorable short-term. The circumstances should be utilized to your advantage. Use the opportunity to increase your chances of getting better loans as quickly as possible.

Never Borrow Big

Anytime you consider getting a personal loan after bankruptcy, do well to know that you can pay it back on time. The urge and temptation to take advantage of a loan opportunity to get a considerable sum of money will come; however, you should always bear in mind that the potential of missing a payment and further hurting your credit is not worth the risk. Therefore, be wise and choose payable loans. Apply only for small loans and make on-time payments. This is one of the things that will minimize stress in the long run and provide you with a strong foundation for improving your financial standing.

What If Your Bank Refuses to Help?

Do not be disappointed if your financial institution refuses to approve your application for a bankruptcy personal loan. It happens occasionally, so you should never lose hope if you find yourself in this situation. You probably know that there are various personal loan lenders all around. You can find a comprehensive list of them easily on the internet. There are several websites where you can get such a list of reliable and positively known lenders. These people are always more than willing to provide short-term loans for people with bad credit or poor credit. Another good alternative that you can consider for a loan is a credit union. This gives you a higher chance of success than you could have at your bank.

How to Apply for an Unsecured Loan

The application process for a post-bankruptcy personal loan always requires considerable effort. First, you must assemble your financial record and make it available for assessment. Also, you might be asked to explain how you ended up in bankruptcy, the steps you have taken in response to it, and an explanation as to why the situation will never repeat itself. So, you should be prepared for inquiries that may be seemingly unnecessary.

Personal Loan Eligibility Requirements:

  1. Ask for copies of your credit report from all the three credit reporting agencies. The agencies are Equifax, Experian, and Transunion. Scrutinize each of the copies to ascertain whether or not they are up-to-date and accurate. Also, ensure the credit report reflects your present borrowing situation. This is very necessary. If you notice any error on your credit report, approach the involved agency and rectify it.
  2. Suppose you have filed for bankruptcy under Chapter 13. Any debt you are paying off as part of your bankruptcy schedule will be included in that case. On a different note, if you filed for bankruptcy under Chapter 7, each account on your credit report must be included in your bankruptcy and show a zero balance on the report. Examine and ensure this is in place.
  3. Besides your credit check, your bankruptcy personal loan application will require details regarding your present income. It's necessary to establish that you can afford to make debt payments on time. Therefore, gather and organize all the essential information about your monthly income and its source in advance.

The CASH 1 Conclusion

It's possible to obtain a personal loan while repaying your Chapter 13 bankruptcy plan, but it is challenging. The trustee court will only permit you to assume new types of debt if there is a compelling necessity and if it will assist you in meeting your repayment obligations promptly.

As a result of the bankruptcy's significant negative impact on your credit score, you may need help to meet the qualifications for a loan. Additionally, obtaining the court's permission will be necessary.

Photograph of author Joseph Priebe

Joseph Priebe

Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.

With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.

When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.