If your vehicle was repossessed and you have a deficiency balance, there’s a possibility that you don’t need to repay it if it’s included in your bankruptcy discharge.
Bankruptcy and Car Loans
After vehicle repossession, you may find that you still owe the lender. Typically, once a vehicle is repo’d, it’s prepped for an auction and sold to repay your loan balance. Sale proceeds from an auction often aren’t enough to repay your entire loan balance and other fees incurred during the repossession process, though.
Storage and recovery company fees are also lumped into your remaining loan balance and can be tough to repay. Your auto lender may require that you repay the whole balance in one payment.
This leftover balance after repossession is called a deficiency balance. If you file for bankruptcy, there’s a chance that the deficiency balance could be wiped away. Your auto loan balance, deficiency balance, and other vehicle-related expenses also have the potential to be discharged in your bankruptcy.
Other debts that can be discharged in bankruptcy include:
- Auto accident claims
- Money owed under lease agreements
- Past-due utility bills
- Medical bills
- Credit card balances
The timing of when you filed for bankruptcy matters, though.
If you filed for bankruptcy after the repossession occurred, then the deficiency balance may be eligible for discharge. If you took on the auto loan during bankruptcy and then it was repossessed, then the deficiency balance isn’t likely to be eligible for discharge, and your bankruptcy may be compromised. If you’re in Chapter 13 and you took on a car loan with the court’s permission in the middle of bankruptcy, failing to repay the loan as agreed could result in a dismissed bankruptcy.
According to the legal site Nolo.com, only debts that were incurred before you filed for Chapter 7 bankruptcy can be discharged. Be sure to talk to your court-appointed trustee about your options and what you may still be responsible for after the bankruptcy is discharged, and what options you may have if you’re in Chapter 13.
Getting a Car Loan After a Bankruptcy Discharge
If your bankruptcy is discharged, it means you completed it successfully! After a discharge, you no longer need to ask the court permission to take on new debt, and hopefully, your finances are in better shape than they were before the bankruptcy.
However, your credit score may be worse for wear. One of the harshest side effects of filing for bankruptcy is that it can hurt your credit for up to seven or 10 years, depending on how you filed. Chapter 13, the repayment filing, harms your credit for up to seven years starting from the date you file. Chapter 7, the liquidation bankruptcy, remains on your credit reports for up to 10 years, also starting on the day you file.
Many traditional auto lenders may be unable to assist you with vehicle financing because your credit score can’t meet requirements thanks to the bankruptcy bringing down your credit score. If your credit score is below 660, you may struggle to meet the requirements to get an auto loan approval. However, subprime lenders can help many bankruptcy borrowers despite a poor credit score.
While bankruptcy can haunt your credit reports for years, you’d be pleased to know that many lenders are willing to assist borrowers with a recently discharged bankruptcy. Many bankruptcy borrowers exit bankruptcy with less debt and cleaner credit reports (aside from the bankruptcy listed). While your credit score may not look too hot, you may be able to work with subprime lenders for your next car loan if you can meet the requirements.
Ready to Take On a Car Loan After Bankruptcy?
Finding bankruptcy auto lenders may not be as easy as finding a traditional lender like a bank or credit union. Subprime lenders are signed up with special finance dealerships, and we want to help you find them.
Auto Credit Express has created a nationwide network of dealerships over the last 20 years, and we match borrowers with unique credit circumstances to them at no charge. Get started on your path to an auto loan by completing our free car loan request form.