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Filing for bankruptcy can be a challenging and overwhelming period in your financial journey. But while the bankruptcy process can be tough, and can result in serious financial hurdles, it’s also a relatively common option to choose. For example, annual bankruptcy filings totaled 452,990 in 2023, according to a report from the Administrative Office of the U.S. Courts — an increase of nearly 17% compared to 2022, when 387,721 bankruptcy cases were filed.
Given the current challenges posed by today’s economic environment, the increase in bankruptcy filings year-over-year makes sense. For starters, persistent inflation issues have led to higher prices on consumer goods, causing budgets to be stretched thin. And, the current high-rate environment has led to hefty borrowing costs across the board, putting even more strain on many people’s finances.
But if you’ve filed for bankruptcy recently — or are planning to — it’s important to understand that bankruptcy does not have to be a dead end. In fact, it can be a starting point for rebuilding your financial health, and if you’re a homeowner, obtaining a home equity loan may be a crucial step in that process. That said, it won’t be an easy path to securing a home equity loan after bankruptcy, but the below tips can help.
Compare your home equity loan options online here.
6 tips for getting a home equity loan after bankruptcy
Getting a home equity loan after a bankruptcy can be difficult but there are ways you can improve your chances of approval. Specifically, borrowers will want to:
Understand the timing
Bankruptcy can stay on your credit report for anywhere from seven to 10 years, depending on the type of bankruptcy filed. While this might seem discouraging, it’s crucial to recognize that lenders typically become more willing to work with you as time passes.
As the bankruptcy filing moves further into the past, lenders may view your financial situation more favorably, upping your chances of getting approved for a home equity loan. So rather than applying right after a bankruptcy filing, be patient and proactive about your credit during that time instead.
Learn more about the home equity loan rates you could qualify for here.
Rebuild your credit
After bankruptcy, rebuilding your credit should become a top priority. Start by obtaining a copy of your credit report to ensure accuracy. Then, focus on paying bills on time, reducing outstanding debts and gradually improving your credit score.
Establishing a positive payment history will demonstrate to lenders that you are committed to financial responsibility. You can also consider using secured credit cards or becoming an authorized user on a friend or family member’s credit card to add positive information to your credit report.
Shop around for lenders
Not all home equity lenders will have the same criteria or policies regarding post-bankruptcy lending — the same way that not all lenders offer the same types of loans, terms or rates. So, if you’re looking for a home equity loan after bankruptcy, it can benefit you to take the time to research and shop around for lenders who specialize in working with borrowers who have experienced financial setbacks.
For example, while traditional banks may have stricter requirements, there are financial institutions and online home equity lenders that may be more flexible in their evaluation process. As you conduct your search, be sure to compare interest rates, terms and fees to find the most favorable option for your circumstances.
Consider a co-signer
A co-signer with a strong credit history can significantly enhance your chances of securing a home equity loan after bankruptcy. When you add a co-signer to a loan, they’re essentially vouching for your ability to repay the loan, giving lenders added assurance — which can be vital after a bankruptcy.
However, it’s important to recognize that the co-signer you use is equally responsible for the loan, and any default could negatively impact their credit, so be sure that you have the ability to repay the loan before adding another party to the obligation. Open communication and trust are key when involving a co-signer in the loan application process.
Highlight positive financial changes
When applying for a home equity loan after a bankruptcy, it can help to be prepared and provide evidence of positive financial changes you’ve made in the time since. This could include stable employment, increased income or successful management of other debts. Demonstrating responsible financial behavior and a commitment to improving your financial standing will make a positive impression on lenders. That, in turn, can enhance your chances of being approved for a loan.
Seek professional guidance
Navigating the complexities of obtaining a home equity loan after bankruptcy can be challenging, so seeking professional guidance can be a wise move in some circumstances. For example, it may help to consult with a financial advisor or mortgage broker who specializes in post-bankruptcy financing. They can provide personalized advice based on your specific situation, help you understand the requirements of different lenders and guide you through the application process.
The bottom line
Securing a home equity loan after bankruptcy is undoubtedly a challenging task, but it’s not impossible. By understanding the timing, actively rebuilding your credit, shopping around for lenders, considering a co-signer, highlighting positive financial changes and seeking professional guidance when you need it you can increase your chances of obtaining a home equity loan that works for you. The process won’t be easy, though, so patience and persistence are key elements in your journey toward financial recovery.
Angelica Leicht is senior editor for Managing Your Money, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.
