The Chapter 13 bankruptcy process can take a while to complete – up to five years! It’s the repayment bankruptcy, so filers pay according to their trustee’s repayment plan. But what happens if you need a vehicle while you’re still in bankruptcy? There’s a way to get an auto loan in Chapter 13 if you follow these steps.
Chapter 13 Bankruptcy Auto Loans
Since Chapter 13 bankruptcy can take a while to complete, there’s a way to get court approval to take on new debt. Chapter 13 is the repayment bankruptcy, so many borrowers rely on their vehicles to continue working so they can keep up with their repayment plan.
If your car breaks down and you need another to continue getting to and from work so you can keep paying, bankruptcy courts are typically understanding. That being said, you do need to prove that taking on this new debt is necessary and that it's not a frivolous purchase.
Follow these steps for getting a car loan in Chapter 13 bankruptcy:
- Find a lender that assists bankruptcy borrowers – Not every lender is able to approve a borrower in active Chapter 13 bankruptcy. Subprime lenders that are signed up with special finance dealerships can, however. Applying with a subprime lender can increase your approval odds.
- Get a buyer’s order – A buyer’s order is a document that details the vehicle purchase, and includes the car’s selling price, your down payment amount (if any), and information about your projected auto loan such as the highest interest rate and loan term you qualify for. You need a buyer’s order to give to your court-appointed bankruptcy trustee, so they can file a Motion to Incur Additional Debt to the court. This is vital: next to your vehicle choice, have the dealership write “or similar.” Since court approval can take a while, if the car you want sells while you're awaiting approval, the “or similar” caveat can save you time because you don’t have to get another buyer’s order and can get something else at the same price point and terms without starting over.
- Wait for approval – Your trustee sends the buyer’s order and motion to the court, so now you wait for the approval. Remember that the court and other creditors involved in the bankruptcy have the right to object to the new credit if they feel the car loan will impact their repayment. If one or more creditors object, then you’re likely required to attend a hearing to make a case that the vehicle is needed and fits into your repayment plan.
- If you’re approved – If your Motion to Incur Additional Debt is approved, then the court sends an Order to Incur Additional Debt which you can take back to the dealership to complete the financing process, and take delivery of your vehicle!
ACE Tip: It’s important to remember that you may not get approved for an auto loan during Chapter 13 bankruptcy, depending on your financial situation and the car you’re looking to finance. The court’s decision is largely based on your current budget, income, repayment plan, and the size of the loan you want to get approved for. If you’re denied vehicle financing, then you may have to choose a less expensive alternative to get approval.
Approval Odds After Discharge
If you’re not looking to take on another car loan during bankruptcy out of necessity, or the court simply can’t approve your motion, then it may be a better idea to look for vehicle financing after your Chapter 13 bankruptcy is discharged.
Once a bankruptcy is discharged, you no longer need the court’s permission to take on new credit. Additionally, you’re more likely to have less debt to repay once the bankruptcy is over, which increases your chances of getting a car loan.
After discharge, you receive discharge papers that you can use immediately afterward to prove to a lender that you’re in the clear for vehicle financing.
Ready to Look for a Bankruptcy Auto Loan?
Looking for a lender that can assist bankruptcy borrowers is easier said than done – but we want to get it done for you! Here at Auto Credit Express, we’re here to help with our nationwide network of special finance dealerships.
Complete our free auto loan request form, and we’ll look for a dealer in your local area that assists borrowers in unique credit situations such as bankruptcy. There’s never a cost or obligation to get matched to a dealership in our network, so get started on the path to your next car loan today!