About 40 percent of borrowers who included student loan debt in their bankruptcy proceedings got some or all of it discharged, according to a study published in the American Bankruptcy Law Journal.
But what if you’re among the borrowers still on the hook for student loan payments? You may be wondering if you are eligible to refinance after bankruptcy.
Here is the answer to that question, plus how you can present yourself in the best light to wary lenders.
How lenders look at a bankruptcy
Refinancing after bankruptcy is possible. It’s just not as simple as the application process for almost everyone else.
Like evaluating applicants with foreclosures on their records, lenders’ underwriting teams will take a hard look at you. In their eyes, a bankruptcy shows a history of failing to pay off debt. It makes you a riskier borrower, sure, but not all lenders will deny you because of this.
Lenders care most about how much time has passed since your bankruptcy. At SoFi, Laurel Road, and LendKey, for example, you’re ineligible to refinance if you had a bankruptcy or foreclosure in the past five years. Citizens Bank draws the line at four years.
Other refinancing banks don’t have the same low-tolerance policy, but they may require a cosigner.
CommonBond, for example, mandates that someone endorses your application if you went bankrupt within the past seven years. Your endorser must have a credit score of at least 660, solid income, and meet additional standards that CommonBond doesn’t publicize.
The good news is that having a creditworthy cosigner may also lower the rate you receive on your new loan.
The lenders who look past a bankruptcy are, more specifically, considering it in the context of your overall profile. They are checking boxes about what makes you eligible to refinance, plus what makes you likely to benefit from refinancing.
Eligibility requirements to refinance your student loans may include:
- Minimum credit score
- Minimum income
- Bachelor’s or advanced degree from a Title IV school
Traits of a creditworthy borrower include:
- Strong credit history
- Positive income-to-debt ratio
- Growing career
- Creditworthy cosigner (if necessary)
Bankruptcy affects all of these variables. A Chapter 13 bankruptcy, for example, will live on a credit report for seven years, according to myFICO. Chapter 11 and 7 bankruptcies remain on your credit report for as long as a decade.
Bankruptcy will also significantly lower your credit score. Your FICO score, which is used by credit reporting agencies like Equifax to measure consumer risk, puts the most weight on a borrower’s payment history. Bankruptcy is included in your payment history.
According to myFICO, people with credit scores of 680 and 780 would likely see their scores drop to the 530 to 550 and 540 to 560 ranges, respectively, upon going through bankruptcy. In other words, bankruptcy lowers borrowers to nearly the same credit score.
It is what you do after bankruptcy that helps lenders trust you with their money.
What to consider when you want to refinance after bankruptcy
There’s a reason the first step of a refinancing application takes three minutes or less. When you enter in your information and submit to a soft credit check, you likely won’t be asked about your bankruptcy status.
But you can be certain that if there’s a bankruptcy in your past, it will be found. So instead of trying to hide it, control what you can.
This is easier to do if some time has passed since you were in court. Perhaps you’ve had time to recover, find steady income and rebuild your credit from the ground up. If that’s the case, find a lender that will reward you for this progress.
If your bankruptcy is more recent, the path to refinancing can be harder. Start working on your credit score. Seesaw your income-to-debt ratio by making timely credit card payments and earning that promotion at work. Keep in mind, however, that refinancing is not your only option for managing student loans.
Federal loan borrowers can consolidate their student loans and apply for an income-driven repayment plan (IDR). Borrowers who combine their federal student loans into one could lower their monthly payments by extending the loan term or tying it to a percentage of their income.
Consolidating and switching to an IDR plan won’t save you money the way refinancing with a private lender would. But if a lower monthly payment helps you stay current on your loans, you may later qualify for refinancing.
Talk to lenders about your refinancing options
You may be reluctant to talk about your bankruptcy and student loan debt. But addressing these topics may help you overcome them.
If you are struggling with student loan payments, you may still be able to refinance after bankruptcy. But you have to talk to potential lenders and review their lending requirements.
Don’t wait for your bankruptcy to fall off your credit report. Even if you don’t qualify now for refinancing, you can work on your credit score. That way, you may qualify later.
Whether you’re looking to refinance, consolidate, or simply live a healthier financial life, check out our student loan consolidation and refinancing calculator. It can you better understand the value in refinancing and consolidating.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
|Get real rates from up to 4 Lenders at once
Check out the testimonials and our in-depth reviews!
|2.56% - 7.40%||Undergrad & Graduate||Visit SoFi|
|2.57% - 6.32%||Undergrad & Graduate||Visit Earnest|
|2.58% - 8.12%||Undergrad & Graduate||Visit Lendkey|
|2.80% - 7.02%||Undergrad & Graduate||Visit Laurel Road|
|2.54% - 6.65%||Undergrad & Graduate||Visit CommonBond|
|2.90% - 8.34%||Undergrad & Graduate||Visit Citizens|