Filing bankruptcy is a major financial event which affects your credit. But before you stress about it lowering your credit score, let's look at the specifics of filing bankruptcy, and how it may actually help you get a car loan when it's over.
Bankruptcy Impacts Your Credit Score
Initially, bankruptcy lowers your credit score, making it necessary to start rebuilding your credit with lenders that can work with poor credit. However, the impact lessens over time.
How much your credit score drops depends on how high your credit score is when you file. The higher your credit score, the bigger the drop typically is. People with higher credit scores have more to lose, so their score can fall further than someone's whose credit is bad to begin with.
This consequence may seem harsh, but that may be by design. Bankruptcy is a big step that shouldn't be taken lightly. The impact to your credit score is the trade-off for having your unpaid, unsecured debts wiped away at the end of the process.
There are two types of personal bankruptcy that you can file: Chapter 7 and Chapter 13. Each helps with overwhelming debt, but in very different ways. No matter which bankruptcy you file though, the results can stay on your credit reports for years.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is a liquidation bankruptcy, meaning your court-appointed bankruptcy trustee is in charge of selling off any non-exempt property in order to repay the debts they can. The process generally only lasts between four and six months, and any unpaid debts are wiped away in the discharge when you're done.
Since the bankruptcy process is so short in a Chapter 7, your credit score is impacted quickly. However, you're left with a "clean slate" so to speak, and can typically begin rebuilding your credit right away. One of the easiest ways to rebuild credit after a bankruptcy is to take on new debt carefully and thoughtfully, and make sure all your payments are made on time. Don't go rushing into unnecessary purchases, or apply for new credit for luxury items.
The effects on your credit score due to a Chapter 7 bankruptcy are immediate and long lasting. This is because it pays your creditors by only liquidating just property, and doesn't require you to to repay any of the rest, yourself. Chapter 7 bankruptcy affects your credit score more than a Chapter 13 bankruptcy because it remains on your credit reports for 10 years.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is known as a reorganization bankruptcy. Your bankruptcy trustee makes a payment plan that you're required to stick to in order to repay most of your debts. Chapter 13 lasts either three or five years, depending on the amount of debt involved.
Because of the length of time and the opportunity to repay much of your debt through a Chapter 13 bankruptcy, it has less of a negative effect on your credit score than a Chapter 7. Your credit score still drops, but not as far. Since you're working to repay your creditors and taking steps to help your situation through Chapter 13, it only stays on your credit reports for seven years.
Even though your credit score doesn't take as big a hit, you're still likely to need special financing for an auto loan after your Chapter 13 is discharged. One requirement of a Chapter 13 bankruptcy is going through a mandatory credit counseling course, so you can learn more about debt management, which can help when you're trying to rebuild your credit.
Also, because a Chapter 13 takes years to complete, there's a process in place that allows you to take on additional debt in some situations. This could be a car loan or another expense, but you have to clear this with your trustee and the court in a process called a motion to incur debt. If the motion is granted by the court, you're allowed to proceed with your purchase.
How This Impacts Auto Loans
When your credit is affected by bankruptcy, your path to getting an auto loan, whether during or after, typically starts with a special finance dealership. This is because special finance dealers are signed up with subprime lenders that are prepared to work with consumers who are in tough credit situations, like bankruptcies.
If you need a car loan but don't know where to start, Auto Credit Express wants to help. We work with a nationwide network of special finance dealerships that have the lenders you're likely to have the most success with for bankruptcy auto financing. To get started right now, fill out our fast and easy car loan request form. The process is free, and there's never an obligation to buy.