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Personal loans and Chapter 13 bankruptcy

On Behalf of | Oct 19, 2023 | Bankruptcy |

The decision to declare bankruptcy is a difficult one, but sometimes it’s the only way to dig yourself out of an impossible financial decision. The laws surrounding bankruptcy are complex, and it behooves you to have a strong grasp on both Maryland and federal laws before considering bankruptcy.

Chapter 13 bankruptcy is a type of personal bankruptcy in which the bankruptcy court creates a three- to five-year plan by which a person pays back their creditors. During a Chapter 13 bankruptcy, it’s possible to secure a personal loan, but the process is difficult.

Getting a personal loan during Chapter 13 bankruptcy

It’s not illegal to get a personal loan while going through Chapter 13 bankruptcy. However, the process is far from easy, and a number of restrictions apply.

Crucially, you’re not able to get a personal loan without the approval of the court. Your court trustee will need a demonstration of the loan’s relevance to your financial situation and your ability to pay back your debts. Otherwise, the loan will be rejected.

Credit score implications

Aside from the legalities of getting a personal loan while in Chapter 13 bankruptcy, much of the difficulty stems from finding a lender. Most lenders are unlikely to choose to advance a loan to someone going through Chapter 13 bankruptcy.

When you declare Chapter 13 bankruptcy, your credit score takes a substantial hit, and that hit will linger for seven years after your bankruptcy declaration. During that time, most conventional lenders will not be options.

There are lenders who work with people with low credit scores, and you may be able to find accommodations with one such lender. But keep in mind that the terms of these loans may not be as favorable as those on offer to people with higher credit scores.

During a Chapter 13 bankruptcy, it remains possible to take out a personal loan. However, securing a loan with reduced credit is difficult, and you’ll need permission from the court even if you find a willing lender.