If you file for Chapter 13 bankruptcy, you are able to restructure your debts and then pay them off over a period of three to five years under court supervision. After you’ve repaid your creditors, you will be able to apply for personal loans again, but with a much lower credit score than before, which might limit you to personal loan lenders that work with bad credit.
You can also get a personal loan while you are still in your repayment period for Chapter 13 bankruptcy, but it’s difficult. Regulations vary among states. In most cases, you’ll have to get the court’s permission before you can take out any new credit, including a personal loan.
Key Takeaways
- You can potentially get a personal loan while you are still repaying your Chapter 13 bankruptcy plan, but it’s difficult.
- Due to the impact of the bankruptcy on your credit score, you might have difficulty qualifying for a loan.
- Even if you qualify for a loan, you’ll need to get the court’s permission to take it.
- Your trustee court will only allow you to take on new debt if you have a demonstrated need and the new debt will help you to make your repayments on time.
Can You Get a Personal Loan During Bankruptcy?
You can possibly get a personal loan while you are still paying off your Chapter 13 bankruptcy plan, but it can be difficult as a result of the rules that govern Chapter 13 bankruptcy.
Types of Bankruptcy
The six different types of bankruptcy in the United States are Chapters 7, 9, 11, 12, 13, and 15. Chapters 7 and 13 are most commonly used by individuals, while Chapter 11 is primarily for businesses. The other types of bankruptcy are for more specialized purposes.
The differences between Chapter 11 and Chapter 13 bankruptcy include eligibility, cost, and the amount of time required to complete the process. Chapter 13 is for individuals with stable incomes, while also having specific debt limits. This type of bankruptcy includes an appointed trustee who will distribute all income to creditors over a three- to five-year period.
Note
The law recognizes that people who are still in the repayment period of Chapter 13 bankruptcy may need to take out new loans. However, in most cases, you must get the court’s permission to borrow money.
Credit Score
Even if you get court approval to take on a new loan during your Chapter 13 repayment period, you will face a second obstacle: your credit score. A Chapter 13 bankruptcy will remain on your credit report for seven years, and it has a significant effect on your credit score.
Depending on what your credit score was before bankruptcy, it can be difficult to qualify for any kind of personal loan. Most of the best personal loan lenders require a credit score of at least 600. If your credit score is below that, you’ll need to look for a lender that works with bad credit.
How to Get a Personal Loan During Chapter 13 Bankruptcy
Before looking for a personal loan while in Chapter 13, understand that your trustee court will only permit you to incur new debt for personal, family, or household purposes if it is necessary for you to continue to make payments under your plan.
For example, if you need a reliable work car to earn money to make your Chapter 13 repayments, the court may approve you to take out a loan to purchase a vehicle.
In rare cases, the court may allow you to purchase a new home, but only if your monthly mortgage repayments are lower than your current rental costs.
Applying for a Personal Loan in Chapter 13
If you believe that you qualify for a personal loan while in Chapter 13, the first step is to look for a loan.
You can apply for a personal loan from any lender. However, your bankruptcy will appear on your credit report, and your credit score is likely to be much lower than it was before your bankruptcy. This may limit you to bad-credit personal loans, or other types of financing for bad credit.
In any case, the process of applying for a personal loan is the same whether you are in bankruptcy or not. Once you are approved for a loan, you will receive your funds and must then repay them with regular payments over a set time period.
Getting Permission to Incur New Debt in Chapter 13
Next, you must get permission from the bankruptcy court to take out the loan. The specific procedures for this vary by court, so you should check these with your attorney. In general, however, you’ll have to:
- Get a sample financing statement from your lender that outlines the loan terms.
- Fill out the Chapter 13 trustee’s paperwork, which is normally available on the trustee’s website. These forms will ask you to justify why you need the loan.
- File a motion asking for the court’s permission to borrow money and send it to your creditors, the trustee, the U.S. Trustee, and any other interested party.
- You might need to attend a short hearing in court. In some cases, the court might grant your motion without a hearing.
- If the court grants your motion, you must give the lender a copy of the court’s order. Lenders must see this before approving the loan.
Keep in mind that this is not a guaranteed process, so you may not be approved for the loan. It can take a month or more to go through the process before you can even receive approval.
It may be tempting to take out a payday loan while you are in Chapter 13, but payday loans are regarded as a form of predatory lending, and may push you further into debt.
Alternatives to a Personal Loan During Chapter 13 Bankruptcy
The process is the same for taking out any kind of new debt during Chapter 13, whether this is a personal loan, a peer-to-peer loan, or a car loan. Different trustees have different rules about what kinds of debt you can take on, so check with your Chapter 13 attorney before applying for any kind of loan.
If you are facing financial difficulties, however, it’s often better to renegotiate your Chapter 13 agreement rather than take on new debt. The process for this depends on whether your difficulties are short-term or long-term:
- If you are facing short-term difficulties meeting your Chapter 13 repayments, talk to your Chapter 13 attorney, who can try to arrange with your Chapter 13 trustee to postpone your payments by a few months.
- If your difficulties are more long-term (such as if you’ve lost your job), an attorney might be able to modify your Chapter 13 plan so you pay less. You’ll probably need to appear in court as part of this negotiation.
Can I Get a Credit Card During Chapter 13?
In general, you are barred from taking on any new debt while in Chapter 13, unless you have a pressing need. If a loan can help you repay your debts, such as if you need a loan to get a new car to go to work to earn wages, it’s possible that you may be allowed to take on more debt.
How Long After Bankruptcy Can I Get a Car Loan?
It’s possible to get a car loan immediately after bankruptcy, but you should be prepared to have your credit history come under closer scrutiny from lenders.Your credit score will be much lower after bankruptcy, which could mean you would likely pay higher interest rates or get denied a loan.
How Long Does It Take to Rebuild Credit After Chapter 13?
A Chapter 13 bankruptcy stays on your credit report for seven years. In general, it takes 12 to 18 months to start improving your credit score after your Chapter 13 bankruptcy is discharged, but it may take many years to get back to where you were.
Will My Credit Score Go Up During Chapter 13?
You can start to rebuild your credit score during Chapter 13 bankruptcy by making on-time repayments to your bankruptcy plan. However, it’s likely to take a few years to repair the impact of a bankruptcy on your credit score.
Can I Pay Off Chapter 13 Early?
In most cases, the court will only let you complete your Chapter 13 bankruptcy early under two conditions:
- You can pay all of your claims, including unsecured debts, in full.
- You can prove a financial hardship.
The Bottom Line
You can get a personal loan while you are still repaying your Chapter 13 bankruptcy plan, but it’s difficult. Your trustee court will only allow you to take on new debt if there is a pressing need for you to do so, and if it will help you to make your repayments on time.
Due to the significant negative impact of the bankruptcy on your credit score, you might have difficulty qualifying for a loan. Even if you qualify, you’ll need to get the court’s permission to take it.
