How Bankruptcies Affect Your Ability to Qualify for a Loan

Having access to capital is critical for any small business owner. In order to get capital, you will need to prove that you have a strong history of repaying debt to convince most lenders to give you a loan. However, if you have an open bankruptcy, it can be hard to qualify for a loan. It is not impossible to get a business loan if you have declared bankruptcy. Many lenders will consider your application depending on the circumstances that led to your bankruptcy and what you learn from it.

Today we will discuss how open bankruptcies can affect your ability to qualify for a loan, and how to improve your chances of qualifying in the future.

What is Bankruptcy?

Bankruptcy laws are created to give let people have a fresh start if they have a lot of debt. There are several types of bankruptcies, but the most popular ones are Chapter 7 and Chapter 13. Chapter 7 is often called liquidation bankruptcy since it discharges most unsecured debt, including personal loans and credit cards.

Chapter 13 is referred to as reorganization bankruptcy. Anyone who files this is put on a repayment plan and needs to pay creditors back over time.

Bankruptcy is considered a last resort for those in debt, most people who file are granted exemptions. Many cases get discharged which means the filer was no longer obligated legally to repay the debt.

How Bankruptcy Affects Your Credit

Filing for bankruptcy erases any history of good credit and can stay on your credit report for up to 10 years. You also have to report your bankruptcy filing to future employers, on medical forms, and on government official reports.

Bankruptcy also destroys your credit score. It can lower your score as much as 200 points which can put your score at a very low number.

How Bankrupt Affects You

If you are in the process of filing for bankruptcy, it might be challenging for you to get financing immediately. The impact of a bankruptcy does diminish over time but you may still face issues when applying for a loan after the bankruptcy discharge.

How to Improve Your Chances of Getting a Loan

Many lenders will consider you for a business loan, especially if your circumstances were extraordinary and not because of poor financial management.

Here is what you can do to improve your chances of being approved for a business loan:

  • Wait until bankruptcy is discharged.
  • Avoid the same mistakes. Do not accumulate debt that you cannot manage. Make sure you make all your payments on time and be careful not to take on additional debts that you cannot pay down.
  • Have a strong business plan. They will want to make sure that your business is viable and that you will have enough cash flow to make your payments on time.
  • Attach and explanation for your bankruptcy. This will show how your financial situation has improved since then. Keep this explanation brief.
  • Find a co-signer: lenders are less likely to see you as less of a risk if you have a strong credit history.

The Bottom Line

Bankruptcy can negatively affect your ability to get financing but by working hard to fix your credit and avoid the mistakes you made that made you bankrupt; you will have a better chance of securing a business loan and rebuilding your future.