Bankruptcy: Making a Fresh Start with a Car Loan

It’s useful to begin by taking a deep breath and looking at the big picture. Bankruptcy laws were created to help people whose financial situations have spiraled out of control. The whole purpose of bankruptcy is to eliminate your debt to give you a fresh start and then do better at managing your finances. A fresh start auto loan is not only a way to drive a better car but is a great tool to start rebuilding your credit.

Getting a used car loan during or soon after a bankruptcy is actually a great way to start rebuilding your credit score – just make sure you make your payments on time. Waiting isn’t going to improve your credit, but obtaining credit and managing debt responsibly will help your credit recover.

There are two major types of personal bankruptcies. Chapter 7 is a type of bankruptcy that wipes your debt out entirely, giving you a clean slate, and it typically only takes a few months from start to finish. Bankruptcy laws, however, continue to evolve. Lately, Chapter 7 bankruptcies are becoming less common. On the rise are Chapter 13 bankruptcies. Rather than wiping out your debt, a Chapter 13 filing creates a plan for you to pay your debts off over the course of three to five years.

Your ability to obtain financing is going to depend on a variety of factors. If you’re about to declare bankruptcy, don’t try to get a used car loan. When you’re on the verge of bankruptcy, your credit score has probably already tanked, and your debt-to-income ratio is at its worst, a combination that practically guarantees you won’t get approved, so don’t bother trying.

If you’re going to be filing a Chapter 7 bankruptcy, you can start applying after you file and have had your 341 hearing where the judge reviews your information. Your credit score will still probably be very low, but your debt-to-income ratio is about to improve greatly since your debt will be wiped away, which can put you in a position to obtain financing for a used car. You won’t get the kind of low interest rates people with better credit can get, but there are lenders who will work with you. They know you’re starting fresh and trying to do better, so although you are still a riskier bet, they’ll just charge you a slightly higher fee to get the loan through them. It’s a small price to pay for the car you need, right?

The same caution of not applying for financing if you’re about to declare bankruptcy applies to a Chapter 13 filing as well. Because a Chapter 13 tends to last at least several years, it will be “open” for that amount of time as you go through your repayment plan. You can still get a used car loan during an open Chapter 13 bankruptcy, but it takes a little more work. Get in touch with your bankruptcy trustee or attorney and give them the heads up that you need to buy a used car and also need to finance it. Why? A lender won’t approve you without a signed Authorization to Incur Debt. This legal document will be created by your bankruptcy trustee, and it will lay out very clearly the maximum monthly payment you’re allowed to take on and declares that this new loan and debt will not be part of the open Chapter 13 bankruptcy. If you need to get a car, make sure you have this court document in hand before you start shopping around.

You do have to meet some minimum requirements. Number one is your income, ideally obtained through steady employment, but retirement, SSA-SSI and child support can all count if they can be verified. Most bankruptcy lenders want to see that you have at least $1,500 of gross monthly income each month. The lender will also want to make sure you haven’t had a vehicle repossessed during the last twelve months. Repossessions a huge red flag for all lenders. Finally, you may or may not be required to make a down payment. If you can come up with a down payment, lenders will view this favorably. If you can’t come up with any cash for a down payment, there are lenders who may not require one. But it’s worth your while to save up $500 or $1,000 if you can because it will help you get better terms on a used car loan.

Perhaps the most important thing about purchasing and financing a used car after bankruptcy is to make sure you’re being realistic with your expectations. You to be especially sure that you choose a car you can afford within the context of your financial situation. The last thing you want to do is get a car you really can’t afford and find yourself in dire straits again so soon after declaring bankruptcy.

If you’re ready to leverage the fresh start a bankruptcy is giving you, Auto City can help. Not only do we have a truly fantastic inventory of high-quality used cars, we also have recently launched Day One Credit –  a program that serves exclusively bankruptcy customers. We worked hard at putting together a robust network of lenders, including those who are willing to work with people declaring bankruptcy to get them into the used car they need. Feel free to begin by filling out our short secure application , or contact us today to ask any questions you may have about bankruptcy used car loans.