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What is a subprime borrower?

You're considering bankruptcy and trying to plan for the future. You're already thinking about how you can build your credit back up after you file, and you know that using credit cards responsibly is one way to do it. You have to prove you can pay off debt properly.

However, one of your friends mentioned that you'd likely be a subprime borrower in the wake of a bankruptcy filing. What does that mean?

Generally speaking, it means that lenders think of you as a relatively high risk. You may get an interest rate that is higher than the normal one offered. If you miss a payment and get default penalties, they could also be higher.

That said, there are also upsides to filing for bankruptcy, as the lenders see it. For one thing, you can only use Chapter 7 bankruptcy every eight years. If you just used it, they know for a fact that you can't do so again for nearly a decade. Other borrowers can.

Plus, the liquidation process eliminates your debt under Chapter 7. This means your debt-to-income ratio actually looks pretty healthy to the lender. Yes, you may have struggled financially in the past, but they'll feel better about lending you money if that loan is going to be the only debt you're responsible for.

It's good that you're already thinking of the future as you consider bankruptcy. The more you know about the process and your potential options, the better. Remember, bankruptcy is a tool that you can use, and it may help you get where you'd like to be if used correctly.

Source: Bankrate, "Bankruptcy timeline: Rebuilding credit," Brigitte Yuille, accessed Jan. 05, 2018

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