There are a number of things that you need to consider when you file for bankruptcy. This article will discuss how it will affect your ability to buy a car once the bankruptcy is over.

Here at Auto Credit Express, because we deal in bad credit car loans, we find ourselves answering questions from customers about bankruptcy and how if affects buying a car. In the following article, we will attempt to answer some of the more common questions

What types of bankruptcies are there?

For individuals, there are basically two types of bankruptcies – a Chapter 13 and a Chapter 7.

The Chapter 13 bankruptcy filing establishes a court-appointed trustee. The trustee sets up a payment schedule that must be adhered to during the length of the bankruptcy – normally three to five years. The amount of payment and the length of time are determined by a number of things including the amount of property involved as well as the individual’s income and expenses. As part of the Chapter 13, you may have a choice as to whether or not you want to “cram” a loan. This involves the court forcing the lender to reduce the amount owed on the loan. “Cramming” not only reduces the payment, it also reduces the amount the lender receives when the secured asset is paid off.

The Chapter 7 bankruptcy filing liquidates a debtor’s assets and distributes the proceeds to the unsecured creditors. Unlike a Chapter 13, a Chapter 7 can only be done once every 8 years. While most debts under a Chapter 7 can be discharged, certain obligations, such as spousal support, taxes and student loans, are exempt and cannot be discharged. This type of bankruptcy also allows the filer to “reaffirm” a debt. In other words, you can inform the court that you don’t wish to include a portion of your debt, such as a car, in the bankruptcy. By doing this, you retain the property, but you also must continue making payments on the loan.

Once the bankruptcy has been successfully completed, you will receive a discharge order. If the bankruptcy has not been completed successfully, you will receive an order of dismissal. In the context of a bankruptcy, a discharge is good and a dismissal is not good.

Is there more than one kind of repossession?

There are two types of repossession – voluntary and involuntary. A voluntary repossession is when the vehicle is brought to a place designated by the lender and surrendered. An involuntary repossession happens when a vehicle is towed away by a repossession service. Contrary to popular belief, there is no difference between the two. Both will show up on a credit report as a repossession.

What should I consider before I file for bankruptcy?

Before you file for bankruptcy, you need to know how lenders, specifically car lenders, look at your car loan history as it pertains to bankruptcy. In addition to other items on your credit report, car lenders will pay specific attention to how you treated your car loan in a bankruptcy.

1.    If you are considering repossession, the timing can be critical. If there has to be a repossession, it must be part of the bankruptcy. Lenders don’t like repossessions before or after a bankruptcy – especially after. A repossession before a bankruptcy could mean that you are using the bankruptcy to avoid paying any negative equity once the vehicle was sold by the bank at auction. A repossession after the bankruptcy means you didn’t learn your lesson. For the most part, a repossession outside of bankruptcy will prevent you from getting a car loan from anyone (including subprime lenders) for the next few years.
2.    If you file for a Chapter 13 and “cram” your car loan, you will have very little chance to get a loan from the same lender for quite some time, if ever. If you don’t cram the loan, once you get out of bankruptcy the lender will look at your loan payment history as well as the rest of your overall credit history in determining whether to approve you for a new loan. If you did “cram” the loan, you will probably have to deal with a subprime lender once the bankruptcy is discharged.
3.    In order to apply for a car loan during a Chapter 13, you need to petition the trustee for an order to incur additional debt. Without this order, you are not allowed to apply for any loans during the bankruptcy.
4.    If you file for a Chapter 7 and don’t reaffirm your car loan, the lender has the right to repossess the vehicle. If this happens, don’t expect the lender to give you an approval on another vehicle loan after the bankruptcy. If you do reaffirm the loan, the lender will look at your payment history before and during the bankruptcy – as well as your overall credit history – in considering a loan after your bankruptcy.
5.    If your Chapter 7 included a repossession and you need a car loan once the bankruptcy has been discharged, chances are good that you will have to apply for a loan with a subprime lender (sometimes called a bad credit car loan) as opposed to a regular lender.

The Bottom Line

If you currently have a car loan, there are a number of things to take into consideration before you file bankruptcy. If you want to continue to deal with a prime lender, make sure that a repossession is not part of the equation. Even if it isn’t, there is no guarantee that the lender will want to continue doing business with you. If there is a repossession, however, there is no way a lender will give you another loan. Period. End of discussion.

At the same time, if you have a repossession and it is not part of a bankruptcy, you have very little chance of getting a loan from anyone – and that includes subprime lenders.

Here at Auto Credit Express, we help customers reestablish their credit by matching them up with dealers who specialize in bad credit car loans. For more information, visit our web site at www.autocreditexpress.com.