Bankruptcy Auto Loans: How to Get a Car Loan After Chapter 7 or Chapter 13
- You can still get an auto loan even if you’ve filed for bankruptcy, although it’s more difficult to qualify for a loan.
- Using an online loan marketplace can make it easier to find lenders that offer car loans to people who have gone through bankruptcy.
- Financial discipline improves your odds of getting a car loan after filing for bankruptcy.
- You might be able to keep your current car if you’ve filed for bankruptcy.
Although it may be challenging and will likely be more expensive, you can obtain a car loan after bankruptcy. If you’re able to earn a steady income and demonstrate financial responsibility after bankruptcy, it could be easier to get a loan.
How bankruptcy affects your ability to get a car loan
Bankruptcy laws are designed to give consumers a way to discharge debts they can no longer afford to pay. The two most common types for individuals are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy
Chapter 7 is known as a liquidation bankruptcy. With this process, the trustees can sell your property to pay your creditors, minus certain exempt property like retirement accounts, basic household items and other necessities — which may include your car.
You may be able to keep your car if you file a motor vehicle exemption, which is based on the equity you have in the car and how much debt you owe. You’ll need to be current on your payments and be able to prove that you can continue to afford the payments after the bankruptcy. However, a lender can still seize your car if you fall behind on payments.
If you need to take out a new car loan, you might have to wait until your debts are discharged to get approval, which typically takes four to six months.
| How long does it stay on your credit report? | Up to 10 years |
| What happens to your current vehicle? | Trustees may sell your car to pay debts if you don’t qualify for an exemption. You may be able to redeem or keep the car if you can pay the lender the actual value. |
| When can you purchase a vehicle? | 4 to 6 months after debts are discharged |
Chapter 13 bankruptcy
Chapter 13 allows individuals to reorganize their debt, using a repayment plan to catch up on missed and nondischargeable debts. A Chapter 13 bankruptcy prevents repossession of your car while you make payments over a three-to-five-year schedule.
Typically, you’ll have to petition the bankruptcy court for permission to file a car loan application or any other new credit while in the repayment period. When the process is complete, you can get an auto loan without having to get court permission.
A Chapter 13 bankruptcy leaves your credit report faster than a Chapter 7.
| How long does it stay on your credit report? | Up to 7 years |
| What happens to your current vehicle? | You may be able to keep your car if you have income and make the Chapter 13 payments. |
| When can you purchase a vehicle? | Petition the court or wait 3 to 5 years until the end of the bankruptcy process. |
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Where to find auto loans after bankruptcy
Online loan marketplaces
An online loan marketplace (like LendingTree) can make shopping around for a loan easier by allowing you to compare multiple lenders in one place. Enter your information into the online loan application — you can receive offers from up to five lenders.
Since the application process includes your credit history, you can get matched with lenders who offer auto loans after bankruptcy. You can access a network of lenders, and may even be able to prequalify for a loan through the marketplace. Once you’re prequalified, you can work directly with the lender to finalize the loan.
Can you really save by shopping around for auto loans? You bet. LendingTree users save an average of $2,346 by shopping for auto loans on LendingTree’s platform. Dig deeper by reading the recent study of auto loan transactions on the platform.
Credit unions
Because they’re owned by members, credit union auto loans tend to have better rates. Some credit unions will allow you to apply for a loan without becoming a member, but you’ll then need to have a membership to finalize the deal. Typically, you can become a member by opening a checking or savings account with a small deposit.
Credit unions may offer auto loans for people with a history of bad credit and bankruptcies, with names like second chance loans.
Subprime auto lenders
Subprime auto loans are aimed at buyers with credit scores of 501 to 600, typically considered a bad credit score. Bad credit auto loans are similar to other types of auto loans, but there are some things you’ll want to keep in mind while shopping.
- It’s much more difficult to find a zero-down car loan with bad credit, so you may have to save up for a down payment in order to qualify for a loan that you like.
- Subprime loans have higher interest rates than those available to people with higher credit scores. The loan may also have higher fees for application processing and loan origination. Higher fees and interest rates add up to a more expensive monthly payment.
- You’re more likely to have a prepayment penalty with a bad credit car loan. Read the fine print carefully to see if your loan includes a prepayment penalty.
Check out the best car loans for bad credit
Buy here, pay here dealers
Buy-here, pay-here dealers don’t typically use credit checks to make auto loans, so they may seem like a good option if you’ve filed for bankruptcy. These dealers finance loans in-house, without using an outside lender (like a bank or credit union).
Interest rates from these dealers tend to be much higher than those of a traditional loan — this means that over the life of the loan, you’ll ultimately pay more for the car.
Further, these dealers may not report on-time payments, and instead may just report missed ones. That means you might not get credit for your on-time payments, and you could hurt your score if you miss one or more payments.
How to improve your odds of loan approval after bankruptcy
Getting approved for an auto loan after you file for bankruptcy may take some extra preparation to prove that you can manage the payments. If you’ve filed for Chapter 13, you may have to convince the bankruptcy court to approve your plan to get an auto loan.
You can increase your chances of loan approval by following these steps:
1. Rebuild your credit score
It may seem counterintuitive, but your credit score may improve after you file for bankruptcy. The biggest indicator of your credit score after bankruptcy is your financial history before you file.
In a recent study of LendingTree users with a recent bankruptcy on their credit report in July 2024, average scores rose by 69 points (from 533 in June to 602 in August). Notably, though, those in the sample with deep subprime scores saw their credit scores rise by an average of 88.6 points one month after filing — the highest among the credit score groups.
But if your credit score is already in poor shape, filing for bankruptcy may not do much additional damage. Work on rebuilding your credit score to boost the chances you’ll get approved, possibly with a lower APR.
- Get a credit builder loan. The lender deposits funds into a savings account while you make monthly payments, which are reported to the credit bureaus. At the end, the lender pays you the balance, plus any accrued interest or dividends. Credit builders are often available from credit unions, small banks and online lenders. You’ll be asked to provide proof of income and other financial information as part of your application. However, people under certain conditions — such as active bankruptcy proceedings or recent job changes — may not be eligible.
- Become an authorized user. Ask a responsible friend or relative to add you as an authorized user to a credit card account. The primary user’s payment history could boost your credit score if they pay their bill on time — but if they don’t, your credit score could take a hit as well.
- Qualify for a secured credit card. With a secured credit card, you’ll make a deposit that becomes the card’s credit limit — though like any other card, you’ll need to make monthly payments, and interest will accrue on unpaid balances. You can prove you’re building good habits by making on-time payments: It’s a low-risk way for lenders to help people build their credit.
2. Save for a larger down payment
A 10% down payment is typical when buying a car after a bankruptcy. Boosting that to 15% or more will reduce the amount you have to borrow, which could increase your chances of getting a loan with a lower APR.
A larger down payment improves your debt-to-income ratio, which lenders consider when deciding to approve a loan. Further, you’ll pay less interest over the life of the loan. Saving up for a sizable down payment can help you develop financial discipline.
3. Keep your debt-to-income (DTI) ratio low
While the debt-to-income ratio isn’t part of your credit score, it’s a factor lenders consider when approving an auto loan. Some lenders will approve up to a 50% DTI ratio, but aiming for 35% to 46% allows for emergencies and gives you extra cash to put in savings. A lower DTI — say 20% — could help you score better interest rates.
After you’ve discharged your debts through bankruptcy, your DTI will likely improve. This could help you get approved for a new car loan, as lenders know you’ve paid off some of your debts.
4. Choose an affordable car
Lowering your expectations for a new car is a hidden hack to saving money. Shop for affordable (but reliable) vehicles while you get back on your feet after bankruptcy. Look for affordable used cars through online sellers like CarMax, Carvana and Cars.com, as well as local sources like Craigslist and Facebook Marketplace. Don’t overlook used car lots from rental companies, like Enterprise and Hertz.
5. Get prequalified with multiple lenders
Shopping around for the best car loan offers from multiple lenders can really pay off if your credit score is improving. Boosting your credit score can result in lower interest rates and more affordable monthly payments, which can help your finances recover after bankruptcy.
Average monthly car payments by credit score range
| Credit score range | New vehicles | Used vehicles |
|---|---|---|
| All | $749 | $529 |
| 781 to 850 (super-prime) | $728 | $525 |
| 661 to 780 (prime) | $759 | $519 |
| 601 to 660 (nonprime) | $795 | $539 |
| 501 to 600 (subprime) | $777 | $547 |
| 300 to 500 (deep subprime) | $741 | $542 |
Get prequalified with multiple lenders to gain a good sense of what you can afford and compare your offers with any financing options the dealer may bring to the table. Don’t go with your first offer.
Prequalification is only the start of the process. It means the lender has provided an estimate of financing terms based on the information you have provided — but you’ll still have to submit a full application to finalize the loan offer.
Use an auto loan calculator to see the impact of interest rates and down payments on your car purchase after bankruptcy.
What to do if you’re denied a car loan after bankruptcy
If you’re turned down for a car loan after bankruptcy, consider these steps to help you be approved if you reapply:
- Apply with a cosigner. A friend or relative with good credit can apply as a cosigner to increase your odds of being approved, as lenders will consider their credit history in addition to yours. But remember, missing payments on the loan could hurt your credit score as well as theirs.
- Wait and rebuild your credit. If your application for a car loan is denied, it may be better to rebuild your credit with a credit builder loan or make steady payments and finance or refinance later. Give yourself time to repair your financial situation. You can use an app like LendingTree Spring to track your credit score and financial health.
- Find a more affordable car. If you’re denied an auto loan, consider a less expensive car. You can apply for a smaller loan, which may increase your chances of being approved based on your current income and other factors, such as your debt-to-income ratio. You will borrow less money and pay less interest over the loan period.
Frequently asked questions
Yes, you can lease a car after bankruptcy. Still, as with a loan, you may face higher payments and fees than individuals without a history of bankruptcy.
Yes, you’ll likely pay higher interest rates on your car loan, depending on the lender and your credit history.
Yes, you can refinance your car loan after bankruptcy. If it’s immediately after bankruptcy, though, you may want to wait until your credit score and history have recovered some, so you can qualify for a better interest rate or the opportunity to work with a better lender.
While there’s no set limit, some credit unions will work with borrowers with scores as low as 640 who show steady income. LendingTree can also help you shop around for the best car loans for bad credit, and may be able to match you with a lender if your score is as low as 460.
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