Car Loans after Chapter 7 Bankruptcy
Taking out a car loan after Chapter 7 bankruptcy is possible with time, and following a few key steps may even speed up the process. This article will answer common questions about buying a car before, during and after filing for bankruptcy, whether you can keep a car when you file and how to protect it from being repossessed.
- Car loans after bankruptcy: Chapter 7 vs. Chapter 13
- How to get approved after bankruptcy
- What to watch out for after bankruptcy
- Where to find auto loans after bankruptcy
Car loans after bankruptcy: Chapter 7 vs. Chapter 13
A bankruptcy can tank your credit scores and make it more difficult to get approved for loans, but it doesn’t mean being rejected by lenders forever. Each type of bankruptcy affects your debt and credit differently. Make sure to consult with a bankruptcy attorney or non-profit debt counseling agency before deciding whether filing for bankruptcy can help meet your needs.
Chapter 7: FAQs
How does a Chapter 7 bankruptcy work?
Also known as liquidation, Chapter 7 bankruptcy helps individuals and businesses get legal relief from debts they can’t afford to repay.
Filing Chapter 7 automatically stops certain creditors from collecting money you owe them. Then, as part of your bankruptcy proceedings, a trustee will be put in charge of selling your nonexempt assets in order to repay as much of your debt as possible.
Once you file, it takes roughly 20 to 40 days for your meeting of creditors to take place — then, roughly 60 days after that meeting, your discharge is completed.
Can I buy a car before or during my Chapter 7 bankruptcy proceedings?
Purchasing a car, or otherwise acquiring assets, before you file for bankruptcy can be seen as a sign of fraud and can potentially cause problems during your bankruptcy. Additionally, your bankruptcy trustee will sell your newly purchased car unless it qualifies for an exemption (see more on this in “Can I keep my car in Chapter 7 bankruptcy?”).
You may have trouble buying a car once you file for Chapter 7 bankruptcy, since lenders will likely want proof that your bankruptcy has been discharged before offering you a car loan. The safest course of action is to consult with an attorney before applying for a loan.
Can I keep my car in Chapter 7 bankruptcy?
Keeping your property is not guaranteed under a Chapter 7 bankruptcy. However, you may be able to keep your car in certain circumstances, dependent on the amount of equity in your vehicle and the laws in your state.
Some options to keep a non-exempt car include the following:
- Reaffirm your debt: Work out a plan with your lender to repay your loan.
- Redeem your debt: Pay the market value to your lender, usually in a lump sum.
How long do I have to wait after Chapter 7 bankruptcy to buy a car?
Though it’s possible to apply for a car loan after your Chapter 7 discharge, that could take awhile: cases generally last a total of about 3 to 5 months from the date of filing to the day your debt is discharged. And once you’ve cleared that hurdle, beware of high interest rates. (We’ll talk more about what to watch out for after bankruptcy in a later section.)
Chapter 13: FAQs
How does Chapter 13 bankruptcy work?
Chapter 13 gives people with consistent income the opportunity to set up an affordable, three- to five-year repayment plan for their debts. This repayment plan gives debtors the opportunity to keep assets they might otherwise lose to repossession or foreclosure, including a car.
Once you file, it takes roughly 20 to 50 days for your meeting of creditors to take place, and within 30 days after you file, you’ll begin making payments to your bankruptcy trustee, even if your plans haven’t yet been approved, and continue as the plan states once it’s been established. Once your repayment has been completed as required, your remaining debts can be discharged.
Can I keep my car, or buy a new one, in Chapter 13 bankruptcy?
If you have income, and your creditors agree to a payment amount that’s affordable for you, you’ll likely be able to keep your car by making your Chapter 13 payments. You must receive permission from the court in order to buy a car during your Chapter 13 bankruptcy.
Otherwise, like a Chapter 7 bankruptcy, you could wait until your debt is discharged to begin shopping for a car and a car loan that meets your needs.
How to get approved after bankruptcy
After your bankruptcy is discharged, there will be unavoidable damage to your credit. Contrary to the claims of disreputable credit repair companies, no one can immediately remove this information from your credit reports. In other words, there’s no magic reset button.
Bankruptcy lawyer G. Donald Golden says one of the biggest fears of someone filing bankruptcy is not being able to buy a car afterward. According to Golden, the most important thing is to take a proactive approach to your credit — a mix of the following activities can help you repair the damage faster and improve your chances of being approved.
Start building good credit history
Filing bankruptcy affects each person’s credit differently. The more accounts included in your bankruptcy, the more severe the damage. In addition, the higher your scores before filing, the more points you’ll lose; for example, someone with scores around 750 before bankruptcy can expect to lose 100 or more points.
The most important thing is to show lenders you’ve overcome your financial difficulties. The best way to do this by making on-time payments, starting as soon as possible.
Doing this can feel like a Catch-22: you may need new credit to build your credit scores, but you can’t get approved because of bad credit. Here are some of the best ways to get around this obstacle:
- Become an authorized user. If you have a loved one with good credit, ask them to add you to one or more of their credit card accounts as an authorized user. This will cause the account information to appear on both of your credit records as if it belongs to both of you.
- Apply for a secured credit card. These credit cards are designed to help people with poor credit. Instead of qualifying with high credit scores, you qualify by making a deposit.
- Apply for a credit-builder loan. These small loans usually have high interest rates and are paid back relatively quickly; they may not be as beneficial as a secured card or other long-term account, though they can still help you start improving your credit. You’re most likely to find credit-builder loans through a credit union or community bank.
Opt for a low-cost car
It’s difficult for someone with poor credit to qualify for large loan amounts, so another way to improve your chances of approval is by shopping for a cheaper car.
This could mean settling for a used vehicle that doesn’t necessarily have the bells and whistles you’d want, but if you are in dire need of transportation, it could be the difference in getting to and from work.
Still, going cheaper doesn’t necessarily mean you have to skimp on quality. Some of the best rated new compact cars sell for under $16,000, and you may be able to find a used model for much less.
Going cheaper can also help you stay in budget and avoid falling back into financial insecurity. Of course, this solution doesn’t have to be permanent — you can consider upsizing once your income and credit allow it.
Find a cosigner
If your credit is in rough condition, lenders may view you as too big a risk and decline your auto loan applications. Having a cosigner is a way to reduce lenders’ risk and increase your chances of approval.
A cosigner is someone who, along with you, agrees to take full responsibility for loan repayment. If you fail to make your payments, the lender can attempt to collect payment from your cosigner.
A cosigner doesn’t necessarily have to have stellar credit, but finding someone with better credit than yours can improve your chances of qualifying when you apply for an auto loan.
Give it time
Regardless of the steps you take, there’ll be a waiting period before you can qualify for a loan. You may need to present a copy of your bankruptcy discharge order to lenders, and it takes about 60 days to receive the order after your court proceedings.
Even then, Golden says you’ll likely need more time to improve your scores. “The longer [you] wait, the better,” he says. “If there’s any way possible, I’d love to see people wait at least a year.”
While you wait, you can actively work on saving money for your purchase and rebuilding your credit.
What to watch out for after bankruptcy
Golden warns car buyers that the first car loan after bankruptcy is likely to be subprime. Being in a hurry to get auto financing with bad credit can make you susceptible to poor loan terms, scams and the possibility of getting back into debt you can’t repay.
Be prepared to encounter the following:
High interest rates
The average interest rate on a car loan is around 5.3% for someone with excellent credit, according to LendingTree, but for borrowers with subprime credit, Experian reports that rates can be nearly 21% for those buying a used car.
High interest might not seem important if your monthly payments are low, but calculating the total cost of your loan repayment can be a real eye-opener. Here’s an example of a simple calculation, without factoring in taxes and fees, based on a 4-year loan repayment:
A $10k loan with a 5% interest rate = $1,054 paid toward interest
A $10k loan with an 18% interest rate = $4,100 paid toward interest
Long repayment terms
Paying a loan back over a long time period can have its pros and cons. If you’ve had credit trouble, lenders may offer you a long repayment term as a way to lower your monthly payments, which can help you stay within your budget.
But a low payment can distract you from the real cost of borrowing: lower payments may mean longer repayment terms, and longer repayment terms means paying more toward interest. Here’s an example of a calculation based on a $10,000 loan at 10% interest:
3 year repayment = $323 monthly payment and $1,616 in total interest payments
5 year repayment = $212 monthly payment and $2,748 in total interest payments
If your scores are below 600, you may only be able to qualify for subprime loans or “no credit check,” “buy-here, pay-here” financing. Loans like this, targeted at people with poor credit, are known for their predatory nature. These businesses may do things like lend you more than the car is worth and charge high interest rates so you’re immediately upside down on your loan.
Where to find auto loans after bankruptcy
Businesses offering financing without a credit check might seem like your best chance at getting a loan, but the potential damage to your pocketbook is not worth the risk.
When shopping for your auto loan, consider options outside of the dealership and look for financing through your bank, credit union or online lender before shopping for a car.
Credit unions in particular tend to offer products to help people rehabilitate their finances and may be more flexible in dealing with post-bankruptcy issues. Golden advises, however, that there is an exception to this rule: a credit union may not do business with you if your bankruptcy discharge includes debts owed to them.
To find a lender who will work with your credit issues, you’ll have to shop around. If your loan applications get declined, be sure to ask the lender how you can improve your chances of approval next time.
The bottom line
As time passes, your bankruptcy will have less impact on your credit. After roughly 10 years from filing Chapter 7, the bankruptcy will be removed from your credit reports as if it never happened. In other words, a bankruptcy will not permanently ruin your credit or your finances.
In the meantime, if you make the right moves, you can set yourself up for a fresh start. This includes making sure to address ongoing financial issues that could cause you to miss loan payments in the future.
It also means making sure you can afford the total cost of owning a car, including loan payments, insurance, registration, gas, maintenance and parking, so you can avoid getting into financial trouble again.