In this article, we’ll look at why companies offer bankruptcy loans, and how taking one on can offer you a means of rebuilding your credit.
Bankruptcy is a traumatic experience for most forced to file. It invites creditors and accountants to dig into your most personal information, forces the surrender of cherished assets and imposes onerous demands on future spending. Perhaps worst of all, it seriously damages your credit, making it difficult to get back on your feet once you’ve been discharged. But, if you’ll forgive us the cliche, it’s not the end of the world.
For those who have been bankrupt in the past or have been recently discharged from bankruptcy, there’s a good chance a private lender will be able to approve you for a bankruptcy loan. In fact, it’s one of our specialties at Magical Credit. This may be surprising, but there are quite a few reasons as to why a loan company would want to lend out money to someone who has previously filed for bankruptcy.
More Favourable Terms
Personal loan companies can charge people who are bankrupt extra fees and high interest rates. Those with high credit scores are usually able to get favourable terms when taking out loans. By contrast, those with low scores won’t get those favourable terms and will have to pay the company more interest.
Even though these loans are more expensive, it’s important to remember that these personal loan companies provide financial support that usually isn’t accessible via traditional lenders. And most people find the high interest rates to be a fair trade-off considering the situation they are in. If you have a bad credit history or are bankrupt, these companies may be the only viable option.
If you filed for bankruptcy in the past and have paid off your previous debt, loan companies may find this attractive because they know you will be more likely to make repayments on time. As you likely only have one current loan to service, this may make you a more reliable client than someone struggling to balance multiple debts.
Those who go through bankruptcy often come out the other side more financially responsible. A lot of people vow to never get into debt again and will do whatever they can to pay off what they owe. Loan companies recognize this and won’t completely turn down their bankrupt clients.
Although some loan companies will consider those with low credit scores, the best way to ensure you are eligible for a loan is to build up your credit. You can even do so immediately after being discharged from bankruptcy.
Here are a few suggestions.
Get Your Discharge as Soon as You Can
Contact your trustee so you can provide the documents necessary to start the discharge process. In addition to a pre-bankruptcy return, T4 slips and tax information, you will have to provide proof of income and monthly expenses which will be used to determine your incremented payments during bankruptcy. Once your trustee receives the documents they will receive the post-bankruptcy refund. Any assets you own will have to be handed over and credit cards will have to be delivered to your trustee. Those who file for bankruptcy are also required to attend two credit counselling classes each within 60 days and 210 days from declaring bankruptcy. The waiting time for a discharge is a minimum of 9 months, so the sooner you can fulfill all of these duties, the sooner you can start rebuilding your finances.
Build Your Savings
Many are concerned that they will lose their RRSP after bankruptcy. This is not true at all, in Canada, Registered Retirement Savings Plans are protected. Even if you don’t have an RRSP, you can still ask to open a small RRSP at your bank. Opening a savings account will allow you to save money to be used to apply for a line of credit, which will then help you obtain a loan. After filing for bankruptcy, be sure to spend within your means and focus on saving for a while. Spending less than you earn is a change in lifestyle yes, but after bankruptcy making this lifestyle change will be wholly worth it.
Use Credit Cards to Repair Your Credit
It’s important to keep paying your debt, but also consider beginning to build up your credit. There are many ways to build your credit, but after a bankruptcy, secured credit cards are one of the best ways to do so. A secured credit card allows you to take out a line of credit by making a deposit which can be used as collateral in case you default on your payments. Secured credit cards are generally easier to obtain after bankruptcy. If you are unable to obtain one with your current credit score, you can be approved as an authorized user to a friend or family member’s credit card. This allows you to “piggyback” off of their credit making it easier to obtain the lines of credit you need. You could also ask a family member or friend to co-sign a credit card application. Keep in mind that your co-signer is responsible for making payments if you’re not able to do so. Just make sure that when you do obtain a credit card and start making payments, you make those payments consistently and on time. This is key to building your credit up after bankruptcy.
Taking Out A Loan
Once you have your credit score in check, this is a good time to consider taking out a loan. If your credit is still not in a very good shape, but you are interested in taking out a loan, there are some companies that will accept loan applications from those with low credit scores. This can be an attractive option. However, it is highly recommended that you build up your credit as much as possible before seeking a loan. The reason for this is because a higher credit score will give you better interest rates. You will also be more likely to be approved for future loans.
Although it may be difficult to get a loan immediately after being discharged from bankruptcy, it’s not impossible. Loans are essential for those going through the aftermath of bankruptcy because it gives them the leverage they need to get on with their life. One thing to remember, however, is that bankruptcy stays on your credit report for six years after discharge, and that even after six years you are legally required to disclose your bankruptcy to lenders.
Private loan companies such as Magical Credit offer loans to borrowers in more tenuous circumstances. Even if you have a bankruptcy in your rearview, we will still consider your application, taking into account your current income and payment history. While our rates will be higher than those offered to applicants with good credit, they are lower than comparable payday loans, and offer a means of rapidly rebuilding confidence in your ability to borrow responsibly. Magical Credit may be the only lender in Canada that does not go off of a credit score so even with your discharged bankruptcy and low credit score, you are very likely to still be approved!
How Do I Qualify?
There are a few things to consider when applying for post-bankruptcy loans. First of all, make sure that you can afford to pay the monthly payments that will be accruing with the loan! Being in a difficult situation means you have to be extra diligent with your expenses. Is a loan something you have room for in your budget every month? Also check your credit score and consider if you can wait until it’s higher to take out your loan. The higher your credit score before taking out a personal loan, the lower your interest rate will be. Having low interest rates is important when paying back your loan, as you can potentially end up paying more than the original principle in interest over the duration of your loan.
If you think you can afford the loan payments and your credit score is as high as you can make it, then an unsecured personal loan could be for you.
When you apply for your loan you may have to meet some requirements.
- Ability to repay
If you have a steady job with consistent income coming in and the ability to make repayments, you will have a higher chance of getting approved. This is the main requirement lenders look for and is a big determinant of your eligibility.
You will most likely be asked to provide proof of income. Most companies have a minimum income requirement and may need your income to come solely from regular employment. At Magical Credit, we also consider applicants whose primary source of income are government benefits (such as EI or child subsidies).
For those who have filed for bankruptcy in the past, most loan companies will require you to secure an asset which will act as collateral for the loan. Many people who have gone bankrupt may not even have assets to use for a loan. In this case, companies offering unsecured loans (loans without collateral) may be the best option.
If you are not approved for the loan, you can always ask a guarantor to co-sign on your application. This will increase your chances of getting approved.
Bankruptcy is no walk in the park and no one wants to go through it more than once. It takes time and discipline to build your finances back up and become self-sufficient again. It’s definitely not easy, but it’s also not impossible. With the right strategies and the right tools, you can climb out of bankruptcy and start living your life again.
If you’re ready to begin your journey toward financial solvency, learn more about Magical Credit bankruptcy loans.
We provide a simple calculator to help you project your monthly interest payments on a loan between $500 and $10,000 and an FAQ section to help you better understand our services. The application process takes just five minutes, and you’ll receive a response within 24 hours!