You may have heard before that bankruptcy can hurt your credit reports for up to 10 years and make car financing difficult. However, getting an auto loan during the bankruptcy process can be even tougher, due to the extra steps. It’s possible to get financing during bankruptcy, though, so here’s what you need to know.
Taking On New Credit While In Bankruptcy
To take on more debt while in bankruptcy, you must get permission from the court and prove that taking on the debt is necessary. What makes getting a car loan during bankruptcy tough is the extra steps involved that aren’t included in regular auto financing, and proving to the court that this purchase is necessary.
Bankruptcy can also lower your credit score, making it harder to meet a lender’s credit score requirements. Most traditional auto lenders prefer borrowers with good credit, and those with scores below 660 are generally placed in the bad credit category. Getting approved for an auto loan with a poor credit score can be tough, and it's even tougher when you’re in the middle of bankruptcy.
Getting approved for vehicle financing isn’t as common while you’re in the thick of a Chapter 7 bankruptcy as it is in Chapter 13. Chapter 7 is a significantly shorter process, only lasting around four to six months. Since it’s so short, most auto lenders would prefer you to wait until your bankruptcy is discharged before they approve you for financing.
Chapter 13 bankruptcy, on the other hand, is much longer. In some cases, it can last for up to five years, and a lot can happen in that time. Because of this, there's a process in place that allows bankruptcy borrowers to get a vehicle if necessary.
How to Get a Car Loan During Chapter 13 Bankruptcy
If you’re in Chapter 13 bankruptcy and need vehicle financing, the process starts by being current on your repayment plan. You also need to be at least one year past your filing date.
The next step is asking the court for permission to take on a car loan. To do this, it starts with finding a dealership that can assist with bankruptcy borrowers. Most traditional lenders can’t work with you when you’re in bankruptcy, but lenders that can are called subprime lenders. They’re signed up with special finance dealerships – and heading to one of these dealers can increase your chances of getting the auto financing you need.
Once you find a lender that can work with your situation, follow these steps:
- Obtain a sample buyer’s order from a dealer – Choose a make/model that you’d like to purchase. From there, ask the dealer to draft up a buyer’s order with a preferred vehicle, and to outline all the details of the loan including interest rate, vehicle’s information, selling price, and your down payment amount. The sample buyer’s order must include the highest interest rate possible and the words “or similar” next to your car choice. It’s important to choose a vehicle you can comfortably afford since you have to be able to keep up with your bankruptcy repayment plan, too.
- Take the buyer’s order to your trustee – Your trustee takes the sample buyer’s order, and your reasons for needing the vehicle, and they file a Motion to Incur Additional Debt with the court. There may also be a hearing in which you speak to the court outlining your reasons for needing the car loan. If the court approves the adjusted repayment plan with the auto loan included, you get an Order to Incur Additional Debt. You take that order to the dealership and get your vehicle!
It can take a little while to get into an auto loan during Chapter 13 bankruptcy since there’s more paperwork and planning involved than with traditional vehicle financing. The toughest part of getting approved for an auto loan could be considered finding a lender that can help since many auto lenders are wary of approving bankruptcy borrowers – discharged or otherwise.
Getting an Auto Loan After Discharge
Once your bankruptcy is discharged, getting into an auto loan is much simpler. You’re in the clear to incur more debt because you no longer need to ask a court for permission. Additionally, subprime lenders commonly work with bankruptcy borrowers after discharge.
The only extra thing you may need – besides regular items to prove you meet requirements – is your discharge papers if your bankruptcy discharge hasn’t appeared on your credit reports just yet.
Even after a discharge, though, your credit score is likely to have seen some damage. A Chapter 7 bankruptcy can remain on your credit reports for up to 10 years, and Chapter 13 can remain for up to seven years (starting from the date you filed). After some time has passed, the impact of the bankruptcy lessens, but that mark can still make it tough to get approved for vehicle financing.
Subprime lenders and/or in-house financers are likely a better chance at getting you approved for a car loan during bankruptcy, and once it’s discharged.
Finding Bankruptcy Lenders
Instead of driving all over town and hoping you’ll find a dealership that has bankruptcy resources, get with us at The Car Connection. We’ve cultivated a nationwide network of dealerships that assist borrowers in tough credit situations, including bankruptcy.
Get started right now by filling out our free auto loan request form, and we’ll look for a dealership in your local area.