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Picking up the pieces after bankruptcy is a challenging task. Your financial options are limited, but you can still find ways to finance things like a car with a bit of creativity and persistence.
Here’s a game plan to help you minimize some of the impacts of bankruptcy.
Chapter 7 vs. Chapter 13
How quickly you can get a car loan after bankruptcy depends in part on which type of bankruptcy you filed.
Chapter 7 bankruptcy is also known as liquidation bankruptcy. Debtors must usually liquidate some of their assets to help clear their debts.
When you file for Chapter 7, the court can take some of your assets and sell them to pay off your creditors. That may be the case when you have unsecured debts, such as credit cards or medical bills, and you don’t have sufficient means to pay them off.
This type of bankruptcy takes 3 to 6 months to complete, from an initial filing to the discharge of the debt. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years.
Chapter 13 bankruptcy lets you keep all of your assets while you work out a plan to repay your creditors over a defined period, generally 3 to 5 years. Chapter 13 is a better choice if you have assets you want to keep, such as a home or bank accounts, and you have the means to pay something toward your debts.
The repayment plan must be court-approved and involves paying a fixed amount to a trustee regularly. A Chapter 13 bankruptcy can stay on your credit report for up to 7 years.
Know Your Credit Score
There is no industrywide minimum credit score required to get an auto loan, but you will have problems getting approved for any kind of credit, including a car loan, with a low credit score.
After bankruptcy, thoroughly review your credit report before you start car shopping. If there are errors, take steps to correct them.
Lenders will use your credit reports to determine how much of a loan risk you are, and knowing as much as you can about your scores in advance will take a lot of the sting and surprises you might encounter at a dealership.
You can request your free credit report annually from Experian, TransUnion, and Equifax and on AnnualCreditReport.com. You can also check your VantageScore 3.0 scores from Equifax and TransUnion on Credit Karma for free, but these scores may not be the exact scores a car loan lender may use to decide whether to give you a loan.
If your bankruptcy case has been discharged, ensure any debts included in your filing are reported as closed accounts with a zero balance. There may be errors related to the bankruptcy and others that are completely independent.
Based on this information, you should create a strategy to rebuild your credit. It takes quite a while, but the sooner you get started, the sooner you can reduce your risk profile.
- Pay your bills on time, especially those not included in the bankruptcy.
- Consider getting a co-signor for another person’s credit card, which will feed into your credit report.
- Apply for a secured credit card with a low limit. Put minimal monthly charges on it and pay that balance in full to show a positive history.
- Talk to your credit union or bank about special “credit builder” loans that can help re-establish a positive payment history.
How Car Loans are Impacted
A bankruptcy does not disqualify you from getting a car loan, but it could impact the terms of a loan you secure. Lenders may say “no” to a car loan immediately following a bankruptcy, or they will charge a higher interest rate to offset the higher risk you pose. That might be the case with a Chapter 13 bankruptcy, where you still have the means to pay some of your bills.
You could also be charged a higher origination fee to offset the risk the lender will take to underwrite the loan.
Approach different lenders and ask their guidelines for approving loans for people who have gone through bankruptcy. Some lenders may be more forgiving than others, and it’s best to do your homework to avoid wasting time pursuing costly alternatives.
One way to swing approval more in your favor is to put a sizable downpayment when applying for a loan. A down payment of at least 20% is an important good-faith gesture that can reduce your interest rate and the perceived risk because you’ve put a lot of money in play upfront.
Focus Your Search
Traditionally, car manufacturers, banks, or credit unions have been good options for car loans after a bankruptcy. While the flexibility of automaker’s finance units tends to vary, many may be able to extend an offer if they’re under pressure to boost their sales. Banks and credit unions are good bets.
Some financial institutions specialize in working with people who have poor credit or a bankruptcy in the past. Depending on your circumstances, you may need to focus your efforts on those institutions.
One caveat is that you should pass on subprime lenders. These financial companies tend to be in business for people in your situation, making it a habit to hit fringe credit risk applicants with high rates and fees.
Be willing to lease or buy. Your top priority is to get approved for a loan, so consider leasing as an option.
If the lender will give you a loan if you lease the car, strongly consider it. It may not make the most financial sense for you in the short run, but it will have positive long-term ramifications.
If the lender leaves the decision up to you, choose the lowest payment you can find. The last thing you want is unnecessary added financial stress following a bankruptcy.
Asking someone to co-sign a car loan for you after bankruptcy could make it easier to get approved. It could also save you money if you qualify for a lower interest rate with another borrower who is seen as low-risk.
However, a co-signed loan can appear on both credit reports. If you default on the loan payments, you risk harming your co-signer’s credit and relationship with them.
Beware of Unscrupulous Lenders
When you emerge from bankruptcy, you’re financially vulnerable. Some less reputable lenders try to take advantage of that.
For example, a lender may offer car loans with no credit check, but the fine print outlines terms for exorbitant interest rates and fees.
That’s why it’s important to thoroughly research lenders before applying for a car loan after bankruptcy. Reading online customer reviews and checking out their Better Business Bureau (BBB) ratings can also be helpful to learn about their reputation.