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Will Bankruptcy Keep Me From Getting a Loan?
Life doesn't stop after #bankruptcy—you'll still have expenses, you'll still need to buy things, and sometimes, you'll still need a loan. If there is a bankruptcy on your credit report, will it prevent you from borrowing money?
Calling a debtor after a bankruptcy is filed can be a violation of the automatic stay. One of the most powerful tools in your bankruptcy tool box is the automatic stay. The automatic stay is an injunction that goes into effect when the case is filed. An injunction is a court order usually designed to prevent someone or some entity like a company from taking some kind of action. When a bankruptcy case is filed, this injunction or “stay” goes into effect to immediately limit what creditors can do with respect to collecting a debt from the person filing or with respect to taking charge of the filer’s property to satisfy the debt through repossession, foreclosure, garnishment or other means.
In a Chapter 13 case, the automatic stay also protects the debtor’s co-borrower. Creditors are not allowed to take collection action against someone who signs on a debt with a debtor, even if the co-borrower does not file bankruptcy himself. It is important to note, however, that this co-debtor stay does not apply in a Chapter 7 case. This protection is so important to some filers that they will choose to file a Chapter 13 case rather than a Chapter 7 case to protect a co-debtor. To learn about other reasons to file a Chapter 13 case, see When to Consider Filing Under Chapter 13 Instead of Chapter 7.
The purpose of the automatic stay is to give all parties some breathing room to sort out what the bankruptcy proceeding can and cannot accomplish. It is designed to protect the debtor against actions that might affect him personally and those that might affect his property. This does not mean that a creditor no longer has a recourse for collection of its debt. It just means that the creditor can take only those actions allowed by the Bankruptcy Code or by a bankruptcy court.
The Bankruptcy Code prohibits most collection activity by creditors and collectors, including:
Creditors must stop telephone demands and letter demands, including contact with your work, your family members, friends, and neighbors. Creditors must direct any communication to your attorney, your trustee or the court. If you filed the bankruptcy case pro se, meaning without using an attorney, the creditor is allowed to communicate directly with you for purposes of administering the bankruptcy case, but the creditor is still not allowed to make payment demands on you except what is allowed by the Bankruptcy Code or by a bankruptcy court.
The Bankruptcy Code does not prohibit every type of activity by a creditor. Certain actions by particular types of creditors can go forward, including:
Unfortunately, sometimes a creditor will take an action that violates the stay. When that happens, the creditor may be subject to penalties, which can include paying damages to the debtor. For more on this, visit Your Rights When a Creditor Violates the Automatic Stay.
To take collection actions that would otherwise violate the stay, a creditor must ask the bankruptcy court to lift or modify the stay. To learn more, see Are You a Creditor? Don't Do This in a Bankruptcy Case.
To learn more about when the stay is effective and when it expires, see How Long Does the Automatic Stay Last?
Credit Impact
The biggest downside of bankruptcy is the hit your credit report takes.
"You exchange not having that debt for having a bankruptcy on your report," said Ike Shulman, co-chair of the National Association of Consumer Bankruptcy Attorneys' legislative committee.
However, he said, many people who file for bankruptcy already have tarnished credit due to delinquent loans.
"People don't file bankruptcy because it's an easy decision to come to. It's because they don't have other choices."
-Ike Shulman, Co-chair of the National Association of Consumer Bankruptcy Attorneys' legislative committee
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