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What is a Bankruptcy Loan?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 09 November 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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The bankruptcy loan is a type of loan that may be extended by a lender at some point after a bankruptcy action is approved and granted by a court of law. In many instances, the purpose of the bankruptcy loan is to assist the debtor in settling any outstanding debt that was not eliminated as a result of the bankruptcy. There is usually some type of waiting period that must be observed before the debtor is eligible to apply for a bankruptcy loan.

One of the ultimate goals of a bankruptcy loan is to help the debtor to successfully reestablish a good credit rating after the bankruptcy is resolved. For this reason, it is sometimes possible to obtain a loan of this type immediately after the court grants the bankruptcy. However, there are often limits on the size of a loan that a bank or other lending institutions will provide to someone who has recently filed and been granted bankruptcy. Debtors sometimes may apply for a smaller bankruptcy loan in order to settle any lingering debt that was not dismissed by the courts.

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A bankruptcy loan of significant size is usually not available for an extended period of time. In the United States, debtors who are granted a Chapter 13 or debt reorganization bankruptcy usually cannot receive one of these larger loans until all debts are settled according to the plan approved by the court. In the case of a Chapter 7 or debt elimination bankruptcy, many jurisdictions will not consider the debtor eligible for a larger loan until two years have passed since the granting of the bankruptcy action.

When there is a longer waiting period before a bankruptcy loan can be successfully obtained, the debtor can do several things to begin the process of rebuilding credit. First, all remaining debt must be brought current and kept current. Paying bills on time will make it much easier to obtain a bankruptcy loan once the terms of the Chapter 13 are fulfilled or the waiting period after the approval of a Chapter 7 is completed. Obtaining a secured credit card, building up the savings account connected with the card, and paying off the balance on the card every few months will also help demonstrate financial accountability and make it easier to obtain a bankruptcy loan.

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