Consumer Car Buying Advice Blog

Explaining the different types of bankruptcies and how they can affect your application for a bad credit car loan

What we know

Here at Auto Credit Express, we are more than happy to advise our customers about those things that we are familiar with, and that includes anything to do with car loans in general and bad credit car loans in particular. One thing we will not do, however, is to give anyone legal advice. If you are a customer looking for that kind of advice, we suggest that you consult a lawyer. If you are reading this article and you are contemplating filing for bankruptcy, we also strongly advise you to consult with a lawyer that specializes in bankruptcy law.

What we would like to do at this time is to familiarize you with the different types of bankruptcies as well as some of the terms involved with bankruptcy proceedings. Later on, we will also discuss how, in our experience, a bankruptcy affects your ability to finance a vehicle.

Chapter 7 versus Chapter 13

There are a number of different bankruptcy types in the United States. But for most individuals, the choice is between a Chapter 7 bankruptcy filing and a Chapter 13 bankruptcy filing.

Chapter 7 – This type of bankruptcy is known as a liquidation bankruptcy. During the bankruptcy, all unprotected assets are sold off to satisfy the claims of the creditors. When the debt involves collateral (such as a home or a car), you have three choices:

•    Redemption – In a redemption, you pay for the current value of the collateral in a single cash payment. Once this occurs, the collateral is yours free and clear of any secured interest (such as a bank).
•    Reaffirmation – In a reaffirmation, you agree (reaffirm) that you will continue the debt. You also agree to continue paying on the debt during and after the bankruptcy until the original terms of the contract have been completed.
•    Surrender – When you surrender a debt, you give up all rights to the collateral and it now belongs to the creditor - who is now free sell it in order to recover the balance owing on the debt.

Chapter 13 – This type of bankruptcy is known as a reorganization bankruptcy. A successful Chapter 13 bankruptcy lasts for either 3 or 5 years, depending on how the income of the filer(s) compares to that of the median income of individuals in the state in which they reside and file. The plan must allow for full payment of (1) priority claims (taxes, support) and generally for payment of the value of (2) secured claims (secured by a lien such as an automobile – although this type of claim does not include real estate). It also calls for payment on (3) unsecured claims – in that order. The amount of the monthly payment is based on a form that’s filled out that is an evaluation of living expenses and the disposable income that is left after these expenses. While you’re in a Chapter 13 bankruptcy, you agree to:

•    Make the plan payments as set forth by the court
•    Not incur significant debt without the approval of the court
•    Maintain insurance on any collateral

For both types of bankruptcies, the court appoints a professional called a Trustee. Although the trustee has different duties in both types of bankruptcies, he/she is there to manage your payments and act in the interests of your creditors.

When is a bankruptcy completed?

Bankruptcies are terminated when they are either discharged or dismissed. If a bankruptcy is dismissed, it means that the bankruptcy has been unsuccessful and the filer is still legally responsible for all debts as if the bankruptcy never happened. A dismissal is usually the result of a filer being in a Chapter 13 and not making the monthly payments per the court order. A dismissed Chapter 13 also means that you will have a very difficult time getting approved for a car loan, even from a subprime lender.

When a bankruptcy is discharged, it means that the process has been completed successfully. All debts that can be discharged are no longer legally enforceable against the debtor (some debts such as student loans, child or family support and criminal restitution cannot be discharged).

Reestablishing your credit after a bankruptcy

A bankruptcy will stay on your credit report for 10 years from the discharge date. As a rule, the older the bankruptcy, the less impact it has on your credit rating and FICO score.

The successful completion of a bankruptcy (a discharge, not a dismissal) is also a good time to begin rebuilding your credit. At Auto Credit Express, we are experts at helping you obtain a bad credit car loan that will put you “on the road” to better credit. Simply go to our website, www.autocreditexpress.com, for more information. Once you have made the decision to apply, you can even fill out a loan application in the comfort of your home.

Tags: bad credit, bad credit car loans, Bankruptcy, bankruptcy law, car loans, chapter 13, chapter 13 bankruptcy, chapter 7, chapter 7 bankruptcy, fico, Fico Score, redemption, surrender

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