Getting a Car Loan After Bankruptcy

People often think bankruptcy will hurt their credit so much that they will never again be able to get a car loan or other form of credit. Fortunately, that's not the case. While a bankruptcy stays on your credit for up to seven years (Chapter 13) or ten years (Chapter 7), many people emerge from bankruptcy and are able to finance a car. However, be aware that you'll likely pay high interest and fees. Preapproval and shopping around are highly recommended.

Timing Your Car Loan With Bankruptcy

If you need a new car and can't pay with cash, you'll need to finance it. If you're in bankruptcy, you might have to wait until the bankruptcy is 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 won't 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. Your lawyer might have a list of legitimate lenders who provide car loans to people in bankruptcy or just out of bankruptcy.

If you can't get 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. You can easily use online tools to see if you qualify for a car loan, but before you decide on a particular lender, be sure to thoroughly research the company.

Fraudulent advertisements sometimes make their way into the mail and other advertising venues, and phony or unscrupulous lenders tend to prey on those who have just emerged from bankruptcy. Don't give your Social Security number to any lender until you confirm that the lender is legitimate.

How to Find a Legitimate Lender

Here's generally how to research a lender to determine if it is legitimate.

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. You can check with your state's attorney general's office to make sure the lender has registered in accordance with applicable laws.

Research the lender online. Run a search online to find out more about the company that you're considering dealing with. Borrowers who have previously been scammed or had bad encounters often post about their experiences and warnings online.

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

In a 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.

Learn More About How Bankruptcy Affects Your Credit and Ability to Get Loans

To get more information about how bankruptcy affects your credit and ability to get loans (and to find tips on cleaning up your credit), read Nolo's Credit Repair: Make a Plan, Improve Your Credit, Avoid Scams by Attorneys Amy Loftsgordon and Cara O'Neill.