While you’re going through a bankruptcy, you may be wondering what auto financing options you have during it and what options you'll have once it's discharged. Your choices can change depending on the bankruptcy chapter you file, and how it ends. Let’s get into it!
Auto Loan Options During Bankruptcy
Your car loan options are different depending on how you filed for bankruptcy: Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
Since a Chapter 7 bankruptcy is usually over within six months or so, getting into another vehicle during this short time period is likely to be difficult.
When you need to take on new credit, you must get permission from the court to do so, and then find a lender that can work with you. Many auto lenders, bad credit ones included, aren’t likely to work with a borrower in the middle of liquidation bankruptcy.
Once your Chapter 7 bankruptcy is discharged, you’re going to have an easier time going through the financing process since you don’t have a court to answer to.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy either lasts for three or five years – and a lot can happen in that time. If you need another car while you’re knee-deep in Chapter 13 bankruptcy, there’s a process in place.
First, get a buyer’s order from a dealer. This document has everything that you’re going to pay for when you finance the vehicle, including the maximum interest rate you might qualify for.
The most important part of getting a buyer’s order for a bankruptcy auto loan is putting “or similar” next to the car of choice. It’s a precaution, just in case the vehicle you picked out is sold while you’re getting approval from the court to incur more debt. Without this "or similar" designation, you need to get another buyer’s order and start over if the car has sold.
For a better chance of getting an approval, look for a special finance dealership that has the lending resources to work with bankruptcy borrowers. Once you find one, you need to get the highest projected interest rate that you’re likely to qualify for.
Next, go to your bankruptcy trustee with the buyer’s order and projected interest rate. The trustee determines if you need the vehicle and if you can afford the car based on the current repayment plan you’re in.
If you don’t get permission from the court to incur more debt, you may end up prematurely ending your bankruptcy instead. Be in contact with your trustee to make sure you’re following the rights steps to avoid mishaps.
Auto Loan Options After Bankruptcy
Your auto loan options can also change depending on how your bankruptcy ended. If your bankruptcy was discharged, it means you successfully completed it! If your bankruptcy was dismissed, then something went wrong along the way.
Bankruptcy can be dismissed either with or without prejudice. If your bankruptcy was dismissed with prejudice, then you’re likely to have issues getting approved by a traditional lender or even a subprime lender.
Your best chance of getting into a financed vehicle is likely working with a buy here pay here (BHPH) dealer. These dealerships only sell used cars, and they have in-house financing, so your dealer is your lender.
The perk with BHPH lots is that they may not check your credit reports. A dismissed bankruptcy isn’t an issue if your credit reports aren't pulled. BHPH dealerships usually assign higher than average interest rates, but if you can’t pay for a vehicle with cash, then they’re likely your best bet to get into your next car.
After you’ve successfully completed your bankruptcy, you can usually get into an auto loan pretty quickly once you get your discharge papers or the bankruptcy is reported on your credit reports. Since your bankruptcy is over, you’re likely in a better financial position than what you were in before you filed. The purpose of going through a filing is to come out the other end in a better place and organize your finances for the better – and if you’re discharged, you did it!
The only hiccup is that bankruptcy can hurt your credit score. Because of the damage a bankruptcy can cause to your credit, you may need to work with a subprime lender that’s signed up with special finance dealers. Not all lenders can work with bankruptcy borrowers, but subprime lenders often work with people in unique credit situations.
Ready to Start Car Shopping?
Whether you’re in the middle of bankruptcy or you’ve been discharged, it helps to work with a lender that knows how to navigate unique credit situations. Locating bankruptcy lenders can be a hassle, though, since they may not be easy to pick out in the crowd. That’s where we come in.
Here at The Car Connection, we’ve got connections all over the country with dealerships that are signed up with subprime lenders. Instead of driving all over town hoping to run into a dealer that has bad credit resources, let us handle the search by filling out our free car loan request form. We’ll look for a dealership for you, and there’s never any obligation. Get started right today!