For many New Yorkers, filing for bankruptcy is an emotional process. People – and businesses – that file for bankruptcy do so with the intention of taking back control of their finances.
But even the path after bankruptcy can seem like a daunting one. Our office has spent over a decade working with clients on their plans to rebuild after bankruptcy. In this post we take a look at both the challenges and helpful steps you can take to get a loan after bankruptcy.After a bankruptcy is discharged, you need to take time to incrementally build your credit score. Rushing into getting a loan right after bankruptcy will usually end up with limited options, unfavorable loan terms, and too-high interest rates. This is a danger zone that can draw you towards predatory online lenders, as explained in a previous post. A Chapter 13 bankruptcy is typically removed from your credit report after seven years, and a Chapter 7 bankruptcy will be eliminated after 10 years. Time is key, but there are still steps to take towards better credit and more favorable loan options in the meantime.
One step is educating yourself about credit. Credit history usually plays a bigger role in getting a loan than a credit score. Both are certainly related, but a credit score is a number formulated on the analysis of your credit files, and a credit history covers your entire financial past. You can have a good credit score, but it may be hindered by a big financial mistake you made several years ago. Or, several years of growing credit can show your willingness to turn your life around after bankruptcy. Overall, the loan approval process is different for each lender you work with.
Another fact to know is that lenders don’t just look at your credit score to make loan decisions. Many lenders use a computer program to determine approval status, including systems from Fannie May and Freddie Mac. Once the program approves you, the lender will then looks at your credit score to set an interest rate.
And not every financial mistake is given the same weight when determining a loan. If you have a lien on your home, or you are evading unpaid bills for long periods, your attempts to get a loan will be very difficult. But if you have late bills and pay them off within a couple months, that usually will not turn off lenders. It’s a matter of timing. FHA loans usually require a two year waiting period after bankruptcy, while the common Fannie Mae and Freddie Mac loans require four years. Even then, if a bankruptcy was filed due to mitigating circumstances like being laid off from a job, a lender may look at them more favorably.
And if you are denied a loan after bankruptcy on your first try, there is still hope. You are able to apply elsewhere for approval, or shop around for a better rate. According to MyFico.com, “Looking for a mortgage, auto or student loan may cause multiple lenders to request your credit report, even though you are only looking for one loan. To compensate for this, FICO Scores ignore mortgage, auto, and student loan inquiries made in the 30 days prior to scoring.”
All in all, building a good credit score takes time and patience after bankruptcy. But growing your knowledge of the loan approval and interest rate process, shopping around for the best possible loan, and accumulating good credit can result in stronger financial health.
If you are an individual, couple, small business owner considering filing for Chapter 7, Chapter 11, or Chapter 13 bankruptcy in Queens, New York, Contact the Law Offices of Bruce Feinstein, Esq. today for a Free Consultation.