Can You Keep Home and Auto Insurance After Bankruptcy?

Bankruptcy is a life-changing event that negatively affects your finances in several ways. But it doesn't necessarily spell the end of your home and auto insurance coverage. Assuming your home and car are not seized in bankruptcy proceedings, you can generally maintain your existing insurance coverage, even after bankruptcy. However, when it is time to renew your policy, the negative effect that bankruptcy has on your credit score may result in higher rates or even a nonrenewed policy.

What happens to my homeowners insurance after bankruptcy?

Assuming you are able to keep your home, bankruptcy proceedings alone are not reason enough for your insurance carrier to cancel your policy. Insurance companies can cancel your policy if you miss too many payments as a result of your financial status, but the bankruptcy itself is not sufficient grounds for cancellation.

However, even assuming you continue to pay your home insurance premiums and maintain your policy, bankruptcy proceedings will have a major negative effect on your credit-based insurance score, which is similar to a standard credit score. When your policy is up for renewal, your lower score could likely result in one of two outcomes: Your insurer may raise your rates or choose to not renew your policy.

You may have higher home insurance rates after bankruptcy

Home insurance rates are subject to a variety of changing factors, but bankruptcy could affect your credit-based insurance score and, consequently, your home insurance rates. We have found that particularly poor credit-based insurance scores could more than double a homeowners policy base premium, although rates are also subject to other factors. Bankruptcy will have a severely negative effect on your credit score, meaning you'll likely see a major spike in rates when your policy is up for renewal.

Bankruptcy for homeowners can result in insurers refusing to renew your policy

Insurance companies can also choose not to renew your policy upon its expiration. If a bankruptcy lowers your credit-based insurance score, your insurer may refuse to cover you because you're considered a higher risk.

If you borrowed money to finance your home or car purchase and your coverage lapses, your lender may purchase a policy on your behalf called force-placed insurance. Force-placed insurance is generally more expensive than typical home insurance, with worse coverage, and should always be avoided. When possible, you should always purchase an insurance policy yourself from other providers.

Why do insurance companies care about my credit score?

Insurance companies have found a correlation between people's insurance scores and the likelihood of filing a homeowners insurance claim. People who have poor credit scores are more likely to make a claim than those with strong credit scores. People with poor credit scores generally have a short credit history or a track record of late debt repayments, and this behavior is associated with a higher frequency of insurance claims.

Insurance companies use a credit-based insurance score, which uses certain elements of a person's credit history to predict insurance losses. Bankruptcy, which has a debilitating effect on your credit score, will have a similar effect on your credit-based insurance score, marking you as a higher-risk customer for insurers.

However, some states, including California, Maryland and Massachusetts, have banned insurers from using credit scores when setting home insurance premiums. Residents of these states are less likely to see higher homeowners insurance rates or a nonrenewal following a bankruptcy.

How bankruptcy affects your car insurance policy and rates

The experience you have with car insurance after bankruptcy will have a similar dynamic to that of homeowners insurance. An auto insurer cannot cancel your policy due to bankruptcy alone, but when it comes time for your policy renewal, your insurer can raise your rates or choose not to renew due to the risk posed by your lower credit score.

When permitted by law, about 95% of auto insurers use credit scores when calculating auto insurance rates, according to FICO, so it will probably be difficult to avoid a rate increase when your policy expires after bankruptcy. As with homeowners insurance, however, there are several states in which auto insurance companies cannot use credit scores to calculate premiums, including California, Hawaii and Massachusetts. If you don't reside in one of these states, Geico was the cheapest car insurance company for drivers with bad credit.

How to manage bankruptcy and insurance nonrenewal

If your insurer refuses to renew your auto or homeowners insurance policy after bankruptcy, you may need to find coverage from an alternative source. We recommend talking to an independent insurance agent and, if all else fails, your state insurance department.

Independent insurance agents represent multiple insurance carriers, so they may be able to find an insurer that will provide you with coverage despite your bankruptcy. However, if working with an insurance agent proves unsuccessful, you should get in touch with your state insurance department. It will have a list of insurers active where you live, and you can use that information to research options.

In the case of homeowners insurance, you may be able to apply for your state's Fair Access to Insurance Requirements (FAIR) plan, a policy for higher-risk homeowners who can't get coverage in the private market. These plans tend to be more expensive than typical homeowners insurance and have less generous coverage features, serving as a last resort for those who can't obtain coverage.