For some, bankruptcy may seem like the end of the world. However, according to a study from LendingTree, this may not be the case. LendingTree's findings show that, although costs to borrow go up following bankruptcy, it is not impossible to find loans and qualify for credit. Within just a few years following bankruptcy, borrowers may even be able to find “normal” rates again.
According to the report, around 43 percent of those who filed for bankruptcy have a credit score of 640 or higher within just a year of filing. LendingTree found that mortgage borrowers who have declared bankruptcy with a credit score of between 720 and 739 three years after bankruptcy were offered APRs similar to that of borrowers with no history of bankruptcy. LendingTree notes that this indicates bankruptcy history can be counteracted with strong credit scores.
Still, on average, a mortgage borrower who has declared bankruptcy may expect to pay $8,887 more on average than a borrower who hasn’t declared bankruptcy within the first three years after bankruptcy. After five years, that number drops to $6,032, but in general, lenders, especially Fannie Mae, do not typically give loans to borrowers who have declared bankruptcy.
With the exception of mortgage lenders like Fannie Mae, though, borrowers do not tend to have much trouble acquiring loans following bankruptcy. LendingTree’s research found that very few bankruptcy filers have a harder time than those who have not filed for bankruptcy.
"People may think that filing a bankruptcy would put you out of the loan market for seven to ten years, but this study shows that it is possible to rebuild your credit to a good credit quality," said Raj Patel, LendingTree's Director of Credit Restoration and Debt-Related Services and Products.
"The biggest challenge in rebuilding credit is for the consumer to stick to a disciplined approach by getting access to the credit but sticking to a plan for not overusing the credit,” Patel continued. “The key is to use it responsibly—keeping balances low and making payments on time, which are two of the biggest factors that impact your credit score."