Murphy's Law: you've filed bankruptcy and your car repairs exceed the car's value. You need a new car. Now you're wondering about getting a car loan because you've filed bankruptcy. Here's the “it depends” answer based on whether you've filed Chapter 7 or Chapter 13 and if you're working with a bankruptcy auto lender. In a bankruptcy all pre-petition debt is discharged in bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcies last anywhere from 4-6 months. Lenders will ensure that the loan doesn't get included in the bankruptcy, and a consumer will file a reaffirmation agreement at discharge. This is a promise to the trustee that you know you have a car loan and you will pay, or else risk your car being repossessed.
Consumers use 11 U.S.C. § 522(d)(2) to cover a motor vehicle (just one). For a single debtor who's filing, it has a coverage limit of $2400. This exemption does have a limit to the number of assets it can cover.
Think of a Chapter 7 bankruptcy as an “everything must go sale.” It's a liquidation. The Trustee is the one responsible for liquidating or selling all non-exempt assets to pay debts. Any debt left is cleared away including the discharge.
But you if you need a new car during that 4 to 6-month period to get to work, and otherwise, you're going to need financing. Ask yourself, “Is it possible to wait until the bankruptcy is over?” If you walk into a lending agency and tell them your situation, it's likely your going to have a hard time getting a loan.
On the other hand, a Chapter 13 lasts anywhere from 3 to 5 years and a lot can happen in that time. It is a bit easier, via a subprime loan, to have a lender give you a car loan with a Chapter 13 bankruptcy.
Three Steps to Take Before you Apply
So you've decided a car is an absolute necessity and you need a car as soon as possible, then there are three things you'll need to do:
- Meet with the Trustee – The initial 341 Creditor's Meeting happens within 30-days of filing Bankruptcy. The Trustee is going to examine ALL of your debts and assets (if any) during that meeting. You're actually eligible to apply for a car loan after the 341 Meeting.
- Ask the Trustee and court for permission before you go out and try to secure a loan. They have the right to force you to surrender the car and even dismiss your bankruptcy if you've acted without their consent.
- Realistically know that you that financing the car of your dreams is probably not going to happen, and a reasonably priced vehicle that meets your needs and is within your budget is going to be your best bet.
There are some things you should do when getting a loan after bankruptcy:
- Pull your credit report(s) and find out what your credit score really is
- Apply with subprime car dealerships because they work with special finance lenders
- Start saving money for a down payment if you can or have a cosigner ready
You're allowed one credit report request, per year and for free, that can be made from TransUnion, Experian and Equifax. There are plenty of other ways to get your credit score for free as well.
Always dispute the inconsistencies and outright mistakes in your report. Make sure this is tidied up before you apply for a loan.
If you really can't wait, you can go to a “buy here pay here” dealership because they ordinarily don't check your credit.
Chapter 13 bankruptcies allow the consumer to pay their debt over a 3-5 year period and is more forgiving than a Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, you have the same Trustee for the entire 3-5 year period and you can work with the Trustee on getting a new car. Your going to be paying your creditors back and your payment history will tend to help your cause in buying a new car. If the Trustee thinks that the payments will fit into your Chapter 13 Plan Budget, then you're likely to be given the go ahead to buy the car.
Unlike a Chapter 7 subprime dealership, you can work with a dealership in a Chapter 13 to find a car in your budget. You get a buyer's order listing every aspect of the sale, what the make and model of the car is, price, tax, title and license, fees and the interest rate you qualified for. The dealership also will provide the court the next best choice of vehicle in case the Trustee declines the first choice. Or, if by the time the Trustee makes the decision, and your first choice of vehicle has sold off the lot, then you have a second car to allow a choice to be made on.
So basically it comes to this: You need a new car, you're in bankruptcy so you're going to have to find the right lender AND the right car. Chapter 7 bankruptcy filings will search for a subprime lender and Chapter 13 bankruptcy filings can actually go to a dealer to find a reasonable means of transportation.
This blog is intended for information purposes only and does not establish legal representation or financial guidance.