Often people think bankruptcy will hurt their credit so much that they will never again be able to get a car loan or other credit. Fortunately, that's not the case. Many people emerge from bankruptcy and are able to finance a car. Be aware, however, that you'll likely pay high interest and fees.
Read on to learn how to find a legitimate car loan lender, and to find out about the process for getting a loan during or after Chapter 7 and Chapter 13 bankruptcy.
Timing Your Car Loan With Bankruptcy
If you need a new car and cannot pay with cash, you will need to finance it. If you're in bankruptcy, you may have to wait until it's over to get a car loan, depending on whether you filed for Chapter 7 or Chapter 13.
Chapter 7 bankruptcy. If you filed Chapter 7, you will need to wait until you receive your discharge. Chapter 7 cases typically only last four to six months. Once you have your discharge order, you can use that to show the car loan lender that your case is over.
Chapter 13 bankruptcy. If you filed Chapter 13, you can either:
- wait for your discharge, which will not be entered until your repayment period is over (between three to five years), or
- get court permission to take out a car loan while your case is still pending.
Finding a Legitimate Car Loan Lender
Finding a lender willing to give you a car loan is more difficult after bankruptcy. Start with your own bank, a credit union, or another bank. You should also consider checking with your bankruptcy attorney -- he or she may have a list of legitimate lenders who provide car loans to people in bankruptcy or just out of bankruptcy.
If you cannot obtain a loan through a well-known bank and don't have recommendations from an attorney or other trusted source, be wary of companies offering car loans to people with poor credit. Fraudulent advertisements do make their way into the mail, and phony or unscrupulous lenders tend to prey on those who have just emerged from bankruptcy. Do not give your Social Security number to any lender until you confirm that the lender is legitimate.
Be sure to thoroughly research the company. Here's how.
Look for red flags. Be particularly wary of:
- guaranteed loans regardless of credit
- requests for wire transfer, and
- requests for upfront fees (aside from down payments).
Contact the BBB. Check with the Better Business Bureau, and make sure the company has a physical street address and a customer service line for answering questions, not just for leaving messages.
Contact the attorney general. Finally, you can check with your state's attorney general's office to make sure the lender has registered in accordance with applicable laws.
Applying for a Car Loan After Chapter 7 or Chapter 13 Bankruptcy
Once you find a legitimate lender, you can apply for a loan. You will receive a copy of your discharge order from the court once your bankruptcy is over. You can submit this discharge order along with any other documentation the lender requires to process your application.
Bear in mind that your interest rate will likely be much higher than a typical car loan, and factor this into your decisions regarding how much of a car you can afford -- higher interest rates mean higher monthly payments.
Applying for a Car Loan During Chapter 13 Bankruptcy
Once you find a car loan lender, you will need bankruptcy court approval to obtain the loan. To get this approval, you will need to get pre-approved for the loan and obtain a document from the lender with the approved interest rate, loan amount, and monthly payment amount. You will also need to amend your bankruptcy income and/or expense schedules to reflect the new car payment and show that you can afford it.
You will then need to file a motion with the court to incur debt./ In the motion, you must include information about the interest rate, loan amount, payment amount, and the make, model, and year of the car you wish to purchase. You will also have to explain any changes to your amended income and expense schedules as well as why you need the new car. If your amended schedules show you can no longer afford your current Chapter 13 plan payment, you will need to file a plan modification to change the plan payment accordingly.
Example. Tina is in a Chapter 13 case and wants to buy a car, because taking the bus is making her consistently late for work and is putting her job in jeopardy. Tina's attorney points her to a lender specializing in car loans to individuals in bankruptcy, and Tina obtains a loan for $10,000 to buy a used sedan. Her interest rate is 9%, and her monthly payment will be $225 per month after taxes. Tina's income has not changed, so she doesn't need to amend her Schedule I; however, she will need to amend her Schedule J to reflect the $225 monthly car payment and revise her other expenses to show that she can still afford her Chapter 13 plan payment. To do so, she reduces her entertainment budget and her transportation budget, as gas for her car will be less than her monthly bus pass. However, she still has $100 less left over per month than she had before, and she can no longer afford her Chapter 13 plan payment.
Tina files a motion to incur new debt, includes all of the above information in the motion, and attaches documentation from the lender as an exhibit. She files a plan modification to reduce her plan payment by $100 upon the granting of the motion to incur debt.