A few years ago just about anyone could file a Chapter 7 bankruptcy. With a Chapter 7 bankruptcy all of your debts are liquidated. This type of bankruptcy made it easy to rack up a bunch a debt, charge it off in the bankruptcy, and get a fresh start auto loan a few months later. Apparently this process allowed too much abuse and, late in 2005, Congress passed stricter bankruptcy laws.

Now, before filing bankruptcy, people have to prove they are broke, and they have to attend credit counseling through an approved agency. If they pass the means test, that is to say, they prove they are broke, and attend the credit counseling sessions, a judge could still insist that the person file a chapter 13 instead. With a chapter 13 bankruptcy, the debts are not liquidated; rather, they are paid off over a period of years.

Auto Loans and Bankruptcy

Since more Americans now have to file Chapter 13 instead of Chapter 7 bankruptcy, fewer people are getting approved for an auto loan with bankruptcy. There are two primary reasons for this.

Unlike a chapter 7 bankruptcy:

1. Few Auto Loan Lenders Approve People in Open Bankruptcy. Only a small percentage of national auto finance companies will consider approving an auto loan for a person that is currently in a Chapter 13 bankruptcy.
2. The Court Has to Approve the Loan. If a lender approves the auto loan while in open bankruptcy, they will request an Authorization to Incur debt from the Bankruptcy Trustee. This is a legal document that protects the lender and insures that your new auto loan will not be included in the bankruptcy.

So if you’re in an open chapter 13 bankruptcy and need an auto loan you should plan on it taking a while to complete. I would expect the process to take at least 30 days from start to finish. On the other hand, if you were approved to file a chapter 7, chances are you can get an auto loan the same day.