Whether you should wait to get a car loan after bankruptcy, or if you can get one while you're in an open bankruptcy, depends on your situation and the bankruptcy chapter you’re in.
Chapter 7 Bankruptcy: Easier to Wait
If you’re in Chapter 7 bankruptcy, it’s often better to wait until your bankruptcy is completed before you try for an auto loan. There are two main reasons for this:
- Chapter 7 is a short process, lasting only for a few months. Sixty to 75 days after your 341 meeting, the court sends you a written discharge of your debts if everything is done correctly. It’s considerably easier to get approved for a car loan once your bankruptcy is over since you need permission from the court to incur new debt during bankruptcy.
- Most auto lenders are wary of approving Chapter 7 bankruptcy borrowers in the middle of their filing because there’s a risk of the auto loan being liquidated in the process (being sold to pay off debts). Chapter 7 is called the liquidation bankruptcy, meaning assets and properties are sold to pay on outstanding debts. Most lenders are likely to tell you to wait until your bankruptcy is discharged before you can be considered for vehicle financing.
Chapter 7 bankruptcy is usually over within a few months. Oftentimes, borrowers can keep a modest car or vehicle during the process, and once the bankruptcy is successfully discharged, taking on new debt becomes much easier.
Chapter 13 Bankruptcy: Possible During or After
If you’re in Chapter 13 bankruptcy, getting an auto loan in the middle of your filing is much easier than Chapter 7. Chapter 13 bankruptcy is much longer, lasting anywhere from three or five years since the consumer in Chapter 13 works to repay their debts as much as possible.
It’s still easier to get approved for a car loan after the bankruptcy is discharged, though, because you no longer need court permission to incur new debt.
If you can wait until your bankruptcy is discharged, it’s recommended that you do so. Once your bankruptcy is over and you get your discharge papers, you can head to a dealership or auto lender right away. Odds are, much of your unsecured debt was discharged in the end, freeing up some income to pay for a vehicle and increasing your approval chances.
However, if you can’t wait until the discharge date, there are the five basic steps to getting an auto loan during Chapter 13 bankruptcy:
- Find a dealership or lender that’s willing to work with you during bankruptcy. Subprime lenders or in-house financing lenders are likely your better choices. Many traditional auto lenders don’t work with borrowers in active bankruptcy.
- Choose a vehicle, and get a buyer’s order from a dealership that has “or similar” next to the vehicle’s description.
- Have your maximum interest rate and loan terms listed as well.
- Take the buyer’s order to the court and file a motion to incur new debt.
- If the court approves the motion, you can head back to the dealership and complete the purchasing process. The “or similar” caveat placed on the buyer’s order lets you choose a similar vehicle in case the one you originally chose sold while you were waiting for court approval. If this is the case and “or similar,” isn't on your sample buyer's order, you have to start the process over.
- Take delivery and pay on the auto loan, and continue paying on your bankruptcy repayment plan. Missing either of these payments while you're in an open Chapter 13 bankruptcy can lead to consequences such as a dismissed bankruptcy.
One of the toughest parts of this process is finding an auto lender willing to assist you in getting a car loan during bankruptcy. Bankruptcy takes a toll on your credit score as well, making it tough to meet the credit score requirements of a traditional lender. However, subprime lenders often work with bankruptcy borrowers, and in-house financing lenders may completely skip the credit check.
Bankruptcy Auto Loan Connections
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