Why Bankruptcy Makes it Tough to Get an Auto Loan

Why Bankruptcy Makes it Tough to Get an Auto Loan

Bankruptcy can harm your credit score, and if you need a car loan in the middle of one, there are some steps you must take to get the vehicle you need. It's possible to get a car loan both before and after bankruptcy, and we have tips for finding the right lenders.

Bankruptcy Can Cause Financing Roadblocks

Bankruptcy can make getting approved for vehicle financing difficult, to say the least. One of the biggest roadblocks you may face getting an auto loan approval is a damaged credit score. Bankruptcy can cause your credit score to take a hefty dive. And, if you had credit challenges before filing your bankruptcy you could be at more of a disadvantage.

Additionally, if you need an auto loan in the middle of your bankruptcy, there are some court-mandated steps that you must take to get approved for financing. And to top it off, many traditional auto lenders are wary to work with borrowers in active bankruptcy.

However, there are special finance dealerships that specialize in bankruptcy financing, and we have some insight on the steps you need to take to secure a car loan during bankruptcy. And there’s a light at the end of the tunnel once your bankruptcy is discharged.

Getting a Car Loan During Bankruptcy

The success rate of getting approved for a car loan during bankruptcy varies, depending on how you filed.

Chapter 7 Bankruptcy:

Why Bankruptcy Makes it Tough to Get an Auto LoanIf you were eligible for Chapter 7, you probably have a better chance of getting approved for an auto loan after it’s discharged. This is largely because this bankruptcy is so short – the typical time spent in active bankruptcy is around six months maximum. Chapter 7 is called liquidation bankruptcy, and your assets are sold to repay your debts. Some auto lenders may worry that the auto loan could be included in the liquidation process, and if that happens, they could stand to lose a lot of profit from the loan. You're likely to have better luck applying for vehicle financing after a Chapter 7 bankruptcy is discharged.

Chapter 13 Bankruptcy:

Chapter 13 is another story when it comes to financing a vehicle in the middle of the bankruptcy process. During this chapter, there may come a time where you need a vehicle to stay on track. Chapter 13 can last for either three or five years, and you're issued a repayment plan by your court-appointed trustee. It’s entirely possible that you could require another car loan to get a vehicle in order to keep your job and keep up with your repayment plan.

To get an auto loan during Chapter 13, you first need to find a dealership that’s signed up with bankruptcy lenders (more on finding them later). Once you do, you choose a vehicle and have the dealer draft a buyer’s order. In this document, your maximum interest rate and the car’s selling price must be listed. Additionally, have the dealer put the vehicle of choice and the words “or similar” next to it. This is because the court must approve of the car loan first before you can take delivery, and if the specific vehicle you want is sold before you get court approval, you have to start all over again, unless it's specified for "or similar".

With a buyer’s order in hand, contact your trustee who sends it along to the court for approval. After that’s done (which can take some time), you can return to the dealership, complete all the necessary paperwork, and then take delivery of the vehicle.

Getting an Auto Loan After Bankruptcy

Securing an auto loan after your bankruptcy has been completed doesn’t involve getting the court’s permission to take on new debt. Once you get your discharge papers, you’re set to apply for an auto loan without any strings attached.

With a clean slate and completed bankruptcy, you’re likely to be met with open arms at a dealership that’s signed up with bankruptcy auto lenders. If a lot of your previous debt was repaid or discharged during bankruptcy, it’s likely that you have more room in your budget for vehicle expenses, too, increasing your odds of successfully repaying the auto loan because you may have more disposable income.

Of course, just like any new credit, you need to prove that you’ve got the ability to repay the loan! This means proving your income, providing information about your work history, having a down payment, a valid driver’s license to register the vehicle, and possibly more depending on your situation. If you can satisfy the requirements of a lender that specializes in assisting bankruptcy borrowers, a car loan could be in your future.

Where Do I Find Bankruptcy Lenders?

Lenders that can help bankruptcy borrowers are subprime lenders. They’re signed up with special finance dealerships. You don’t meet with them directly, though, because you discuss your auto loan options with the special finance manager on site. They relay your documents and information to their lending partners on your behalf.

Subprime lenders assist borrowers in many different credit circumstances such as bankruptcy, past vehicle repossession, first-time car buyers, bad credit borrowers without a cosigner, and other tough credit situations.

While they can help in many tough situations, finding them isn’t always easy. That’s where we come in at The Car Connection. Over the last two decades, we’ve gathered a network of special finance dealerships and we want to find one in your local area for you. Begin your car shopping experience with us today by filling out our free car loan request form.

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