What consumers with bad credit need to consider before filing for bankruptcy that might give them a better chance at an auto loan approval once it has been discharged
What we know
Here at Auto Credit Express we sometimes find ourselves answering questions about bankruptcy auto loans. The reason for this is because for the last two decades we’ve been helping car buyers with problem credit find those new car dealers that can give them their best chances for auto loan approvals.
In most instances, the question asked by people with questionable credit goes something like this: “how hard is it to get a car loan after bankruptcy?”
So while we aren’t lawyers and don’t presume to give any type of legal advice, we’d like to touch on how a bankruptcy may affect the ability to buy a car once it has been completed. What we are presenting here are simply observations based on our experiences over the years in subprime car lending.
If you’ll need a car loan after bankruptcy, before starting the process you’ll want to know how lenders, specifically high-risk auto lenders, will view your situation. The reason for this is that aside from the overall situation, subprime lenders in particular pay very close attention to how any car loans were handled as part of the bankruptcy. Let’s take a look:
1. To begin with, these lenders don’t like repossessions either before or after a bankruptcy, but especially after. If you are considering giving a vehicle back to the bank, the timing can be critical. If this must occur, in most cases it has to be part of the bankruptcy.
The reason for this is the fact that a repossession before bankruptcy could mean the filer is using the court to avoid paying any negative equity once the vehicle is sold by the lender. At the same time, a repossession following a bankruptcy means that filers have learned nothing from it and are continuing with their previous poor bill paying habits.
Typically, a repossession that occurs outside of a bankruptcy will prevent someone from obtaining a car loan, other than from a BHPH car dealer, for at least a year. Lenders will also never finance someone who has had a repossession with them.
2. Filing a Chapter 13 and “cramming” a car loan (a process that involves the court forcing the lender to reduce the amount owed on a vehicle to its fair market value, reducing the interest rate and possibly even extending the loan term) will result in very little chance of borrowing from the same lender. If the loan isn’t crammed, once the bankruptcy has discharged, the lender will look at the loan payment history as well as the overall credit history in determining whether to approve that filer for a new loan. If a car loan was crammed, in most cases the only option is applying with a higher-risk lender once the bankruptcy has been discharged.
3. In order to apply for a car loan during a Chapter 13, the trustee must petition the court for an order to incur additional debt. Without this order, no additional debt can be assumed during a 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 a Chapter 7 includes a repossession and a car loan is needed once the bankruptcy has been discharged, in most instances the only option will be a loan from a higher risk lender not a traditional lender.
The Bottom Line
For consumers that are currently financing a vehicle, there are a number of things to take into consideration before filing for bankruptcy. If they hope to continue to dealing with traditional lenders, they need to be sure that a repossession is not involved because if it is, there is no way any of these lender will consider them for another loan. Period. End of discussion.
Even if there is no repossession, there’s still no guarantee one these lenders will consider approving them for a loan.
At the same time if there is a repossession and it’s not part of a bankruptcy but happens either before or after, there is very little chance of getting an auto loan from any lender – and that includes most high risk auto lenders – for a year or more.
One more thing to keep in mind for consumers planning on filing for bankruptcy: at Auto Credit Express we match credit-challenged applicants with those franchised new car dealers that can give them their best chances for approved auto loans.
So if you’re ready to reestablish your car credit, you can begin now by filling out our online auto loans application.