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 generally spell the end of your home and auto insurance coverage —assuming your home and car aren't seized in bankruptcy proceedings. However, when it's time to renew your policy, bankruptcy's effect on your credit score may mean higher rates or nonrenewal.

What happens to my homeowners insurance after bankruptcy?

If you're able to keep your home, bankruptcy alone is not sufficient grounds for cancellation.. But an insurance company can cancel your policy if you miss too many payments due to your financial status.

Even if 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 will likely result in your company raising your rates or choosing not to renew your policy.

You may have higher home insurance rates after bankruptcy

Home insurance rates are subject to a variety of changing factors. Bankruptcy could affect your credit-based insurance score and, consequently, your rates. Particularly poor credit-based insurance scores could more than double a homeowners premium. But it also depends on those other factors.

Bankruptcy for homeowners can result in companies refusing to renew a policy

Insurance companies can choose not to renew a policy when it expires. So if a bankruptcy lowers your credit-based insurance score, your company may refuse to cover you because you're a higher risk.

If you borrowed money to finance your home or car and your coverage lapses, your lender may buy a policy on your behalf. This is called force-placed insurance, which is generally more expensive than typical homeowners, with worse coverage. It should always be avoided: When possible, buy a policy yourself from another provider.

Why do insurance companies care about my credit score?

Insurance companies have found a correlation between people's insurance scores and their odds of filing a homeowners insurance claim. Poor credit scores are linked to a higher likelihood of a claim. People with poor credit scores generally have a short credit history or a track record of late debt repayments. 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 has a debilitating effect on your credit score and a similar effect on your credit-based insurance score, making you a higher-risk customer.

However, some states, including California, Maryland and Massachusetts, have banned companies 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 after a bankruptcy.

How bankruptcy affects your car insurance policy and rates

Car insurance after bankruptcy works similarly to homeowners insurance. An auto insurance company cannot cancel your policy due to bankruptcy alone. But when it's time for your policy renewal, they 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 insurance companies use credit scores when calculating rates, according to FICO. That makes it difficult to avoid a rate increase when your policy expires after bankruptcy. As with homeowners insurance, though, there are several states where companies cannot use credit scores to calculate premiums, including California, Hawaii and Massachusetts. If you don't reside in one of these states, Geico has the cheapest car insurance rates for drivers with bad credit.

How to manage bankruptcy and insurance nonrenewal

If your insurance company refuses to renew your auto or homeowners policy after bankruptcy, you may need to find coverage elsewhere. Talk to an independent insurance agent.

Independent agents represent multiple insurance carriers, so they may be able to find a company that will provide coverage despite your bankruptcy. However, if working with an insurance agent proves unsuccessful, you should contact your state's insurance department. You can get a list of active insurance companies where you live and 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.