Personal bankruptcy will appear on your credit report for seven to ten years, making it more difficult to obtain future credit; however, obtaining a small business loan is feasible after your bankruptcy.
To begin with, keep in mind that since your unsecured debt was discharged and you are no longer eligible to file for bankruptcy for a number of years, lenders may view you as a smaller credit risk than you believe. However, remember that you would be asked to hunt for loans, explain why you declared bankruptcy, demonstrate that your finances have improved, to show that you are now a good credit risk.
What is Bankruptcy?
Bankruptcy is a legal procedure that allows people and organizations to discharge all or part of their debts or return a portion of what they owe. The three types of bankruptcy that are controlled by federal bankruptcy courts are as follows:- Chapter 7: Often known as liquidation bankruptcy. It is designed for people with low incomes who cannot repay all or a portion of their obligations. Everything you possess (even your home) will be liquidated during Chapter 7 to pay off credit card debt, medical expenses, and other unsecured obligations.
- Chapter 13: If you make enough money and do not qualify for Chapter 7, you may be able to file a Chapter 13 petition. It is a three to five-year repayment plan in which you repay all or part of your loans. However, after the time period, your unsecured liabilities will be discharged.
- Chapter 11: This type of bankruptcy is available to businesses that have accumulated a large amount of debt. If your company isn't producing enough money to cover its expenses, you may have to close it down or declare bankruptcy.
Here are some steps you can follow while filing for a business loan after bankruptcy.
Steps to obtain a Business loan after Bankruptcy
- Be ready to put forward business plans: Before applying for company financing, ensure that you have a solid, well-structured business plan to present to potential lenders. The industry in which you seek a loan may also influence your success. If you're looking for investment for a company with a high failure rate, such as a restaurant, prepare solid responses to anticipated questions.
- Keep yourself financially stable: Bankruptcy gives you a fresh financial start, so take advantage of it and avoid making any mistakes that led to your financial problems before bankruptcy. If you can show the lender that you have kept your debts to a minimum following your bankruptcy, you may be able to secure a business loan.
- Furthermore, exhibiting financial responsibility may persuade your lender to extend you a loan. Prepare documentation, such as proof that you have paid your mortgage or rent on time, as well as your car payments, since your bankruptcy.
- Conduct adequate research: If you have filed for bankruptcy, most business lenders will reject you for a loan. On the other hand, certain lenders have more liberal business loan requirements and are willing to work with clients who have negative credit or have been bankrupt. You should probably look at internet lenders rather than traditional lenders like banks or credit unions. Check out reviews when researching and comparing many lenders to ensure you choose a trustworthy lender with an established track record.
- Construct factual explanations: A brief explanation may be provided for each item on your credit report. As a result, if your financial difficulties are the result of a big event, such as a divorce, vehicle accident, or catastrophic sickness or injury, you can place a brief note on your credit report outlining what occurred. Lenders may use this information to determine whether or not you are qualified for a loan.
- It's also a good idea to write down and print out a brief explanation of why you filed for bankruptcy, so you can show the lender what caused your financial issues and why your circumstances changed. Keep this communication short and clear of emotional or offensive words. Don't, for example, give the lender a page detailing how awful your ex-spouse was because he or she didn't pay child support. Instead, state the facts clearly and explain why the situation has changed.
- Make many copies of your statement and include them with your loan application. If you are questioned about the statement, be sure you can articulate the key points.
- Wait for your bankruptcy to be discharged: Even if your case is still pending, you may be motivated to seek business loans as soon as you declare personal or corporate bankruptcy. Wait until your case has been resolved if you want to increase your chances of getting a loan. Check your credit report after the waiting time has elapsed to confirm that the discharge has been reported. If it has been discharged, you should be able to begin your loan application.
To sum it up
Because each lender has its own set of criteria for assessing loan eligibility, your best bet is to call lenders who specialize in small business loans and learn about their lending requirements. If you haven't had any success, consider credit unions. Your local chamber of commerce may be able to identify lenders who offer post-bankruptcy loans.Keep in mind that a lender will usually charge you a higher interest rate and may need you to secure the loan with collateral, such as the equipment purchased with the loan funds or your own house or vehicle, based on your credit history. If you still have trouble finding a lender, consider asking a friend or family member with a good credit history to cosign for you.