People who have filed bankruptcy suffer from a number of income and credit effects that can make it very difficult to qualify for new loans. Some of this depends on each particular situation, including the type of bankruptcy (typically Chapter 7 or Chapter 13) and what the debtor's financial status was before the bankruptcy. But it is also possible to generalize bankruptcy effects and narrow down loan options for struggling debtors to a few options. As bankruptcies have become more common, especially since housing troubles in 2008, many lenders have become more willing to lend to debtors.
Bankruptcies are very damaging to credit, and alone they can drop credit scores by hundreds of points. When combined with other actions that often go along with a bankruptcy, such as a loan default or foreclosure, credit can plummet and make it very difficult for debtors to qualify for any type of financing at all. This is the primary barrier to getting a loan after filing for bankruptcy, although other restrictions may apply. Much of the work the debtor must do focuses on finding a lender willing to lend to a risky borrower.
Traditional loans are made by lenders that prefer to see low-risk borrowers who do not have a bankruptcy on their records -- or at least have a bankruptcy that is several years old. Debtors may have to pay higher interest rates and settle for lower amounts for these types of loans, but they can often qualify as long as they are willing to wait. Many mortgage lenders, for instance, will consider lending to a debtor as long as the bankruptcy is at least two years old. This shows that the debtor has managed credit well in recent times and can be counted on.
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Bankruptcy loans are specific loans designed for people going through a bankruptcy who do not have any other loan options. These loans are easier for debtors to get but also come with risks. In order to manage their own risks, these lenders -- often nontraditional -- require very high interest rates, which can create additional debt problems that the bankruptcy will not take care of. Debtors may also need to receive permission for the loan from the bankruptcy court.
A refinance replaces one existing debt with a new debt that is preferably easier to pay off, often involving new mortgages. There are particular kinds of refinances, such as FHA bankruptcy refinances, that are designed to be used during a Chapter 13 bankruptcy when the debtor must make payments to creditors for up to five years before debts are discharged. As long as the debtor has been following this plan for at least a year, the refinance raises extra money she can use to end the plan early and finish the bankruptcy entirely.