What consumers with questionable credit need to know that might give them a better chance for a car loan approval if their bankruptcy has not yet been discharged

What we know

Here at Auto Credit Express we sometimes are asked about applying for an auto loan during bankruptcy. The reason we get asked this question is because for over twenty years we've been helping car buyers with bad credit searching for online car loans find those new car dealers that can give them their best shot at car loan approvals.

In most instances the question from consumers with this type of damaged credit goes something like this: "how hard is it to get a car loan during 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 if it has not yet been completed. One thing we do know is the answer to this particular question isn't always simple. Here's why:

Bankruptcy auto loans

Applying for a bankruptcy car loan following the discharge of a bankruptcy is a fairly simple process. The only additional documentation that most lenders will require is a copy of the discharge order issued by the court.

But if a vehicle is needed before the bankruptcy is completed, the process for applying for an auto loan really depends on which type of bankruptcy that person has chosen - a Chapter 7 or a Chapter 13.

The differences

Filing for a Chapter 7 bankruptcy involves liquidating the debtor's assets and distributing any proceeds to the unsecured creditors. This type of bankruptcy is typically completed in a matter of months and can only be done every 8 years.

Filing a Chapter 13 bankruptcy involves establishing a payment schedule that must be followed to successfully complete the bankruptcy – a process that normally takes either three or five years.

Since a Chapter 7 is over fairly quickly while a Chapter 13 takes much longer, there are different rules for each type.

Chapter 7

The first step in determining a filer's eligibility for a Chapter 7 is the means test. If this test is passed (and with the more stringent guidelines now in place there's no guarantee that it will be), the next step is the 341 meeting of creditors. At this meeting the court affirms the value of assets and the accuracy of the information contained in the filer's schedule of debts.

The timing of the 341 meeting is important, because although subprime lenders typically require that a Chapter 7 be discharged (due to the short term); a few will review an application once this meeting has taken place.

Chapter 13

The scenario is much different for consumers in a Chapter 13 bankruptcy. Before applying for any type of loan these filers must request the court-appointed trustee to petition the judge for an order to incur additional debt. The order (if it's granted by the court) gives that person permission to take out a loan. In addition, the order details the maximum loan amount and can also specify the maximum interest rate allowed (this last requirement can often be a problem with higher-risk lenders).

If the order is not granted the filer cannot apply for a loan. Since bankruptcy filings appear on credit reports, lenders will already know if an applicant is in a Chapter 13 and will automatically request a copy of the court order before reviewing the loan request.

The Bottom Line

The ability to qualify for an auto loans during a bankruptcy usually depends on the type of bankruptcy, how far along it is and, if it's a Chapter 13, the successful petition for an order to incur additional debt along with a lender's willingness to meet the requirements of the court order.

One more tip: if you are in bankruptcy and meet these guidelines we want you to know that remember is that Auto Credit Express matches people with auto credit difficulties to those new car dealers that can offer them their best opportunities for approved car loans.

So if you find yourself in this situation and you're ready to reestablish your car credit, you can begin now by filling out our online car loan application.