If you have filed for Chapter 13, you're probably hoping to eliminate a significant amount of debt. However, sometimes it is almost impossible to not incur new debt, such as when you require a car for daily obligations. If you do need to purchase a car while involved in a Chapter 13 repayment plan, it is certainly possible, but you have to follow the correct procedure.

Here at Auto Credit Express, we often get questions about how to finance a car while in a Chapter 13 bankruptcy, such as this one:

“I am currently in a Chapter 13 bankruptcy. Is it still possible to get financing for a car?”

The short answer is yes, you can still get financed while in a Chapter 13 bankruptcy. You’ll just need to get the court’s approval, which could take some time. Buying a new vehicle during a Chapter 13 bankruptcy is possible, but you need to make sure that you have a plan, and patience.

The approval process when you are in the middle of a Chapter 13 repayment plan will take longer than your typical car purchase. This is because you will need to not only get approval from the dealer, but also approval from the court to incur new debt. And this process may take 30 days or more, but it's often possible if you follow these steps.

ACE Tip: Be aware of your situation when you're in a Chapter 13. Because of the time frame, there can be issues with your vehicle selection since it is risky for dealers to hold on to inventory, as there is a chance that you will not be approved for the purchase by the court.

Step 1: Find a Qualified Dealer or Lender

helpful car salesman

The first thing you need to do is find a lender that will finance you. It's smart to review all of your options, so there's no harm in trying to get pre-approved with your bank or credit union first. If you have a relationship with a bank or credit union, start there to see what they can offer. However, traditional lenders rarely work with bad credit applicants.

Your best chance of getting approved is with a subprime lender. They are willing to look past credit issues in order to finance consumers, even those who are in a bankruptcy. However, these lending institutions are almost always indirect lenders, meaning they only loan money through car dealers who act as their agents.

Special finance car dealerships are signed up with these kinds of lenders. These dealers are trained and practiced in helping borrowers in a bankruptcy. Therefore, you stand the best chance of being approved with one of them.

The finance departments at dealerships with subprime lenders are experienced in handling all types of credit situations. They'll be familiar with the process of buying a vehicle during a bankruptcy and can help you along the way. Their finance manager will draw up a sample buyer’s order for you to take to the court, but you first have to select a vehicle.

It's important to be realistic during this part of the process. The bankruptcy court isn't going to allow you to finance anything expensive at this time. So, you'll want to choose something affordable to increase your chances of success.

Step 2: Get a Financing Statement from Your Dealership

Once you have found the perfect dealer and the perfect car for your needs and budget, ask your dealer for a sample financing statement containing the loan's terms. You can work with the finance manager at your dealership to select a vehicle that falls into your price range. Now, you need to get a sample financing contract or statement from the dealership. This lists information on the car you plan on buying, the price, loan terms, interest rate, monthly payment amount, etc.

The sample buyer’s order they'll create will list the car you're planning to buy, its price, and your monthly payment amount. There are two very important things the dealer must include on the it:

  • Make sure they list "or similar" next to the car you choose. Vehicle choice is crucial when you'er trying to get another car during Chapter 13. The sample contract will only allow you to purchase a specific car, truck or SUV. Because of the length of time involved, there is a good chance that the chosen car will not be available once the court approval is complete. In order to avoid any issues, be sure that the dealer notes "Or Similar" next to the vehicle choice. This will make it easier to choose another vehicle that still meets the requirements of the court.
  • Have them include the highest possible interest rate you could get. Your request will become invalid if the interest rate you actually get is higher than the one listed on the order. Interest rates fluctuate regularly, but all of the numbers on your court request must be as accurate as possible. So, if a certain interest rate is listed, and, after a month, the dealer discovers that a higher interest rate is necessary, your appeal will be rendered invalid. How can you avoid this? Regardless of what interest rate the dealer actually wants to give you, have them list the highest possible rate on your form. This will give you some insurance against having to start the whole process over again.

ACE Tip: Make sure these stipulations are included so you won’t have to start the process over again in the event something goes wrong.

During this step, there are two things you're going to want the dealer to include on the sample financing statement. Have the dealership list "or similar" next to your vehicle choice and write down the highest possible interest rate you could potentially receive.

The reason for this is that the process of getting approved with the court during Chapter 13 can take some time. The car you had your eye on may be gone by the time you get the green light. Also, your motion can be rendered invalid if the interest rate you actually qualify for is higher than the one listed on your sample statement. Taking these two precautions prevents you from having to start the process over if things go wrong.

Step 3: Take the Statement to Your Trustee

They will measure how much debt you're taking on against the potential impact it will have on your Chapter 13 repayment plan. A Chapter 13 bankruptcy repayment plan lasts for either three or five years. A lot can happen in that much time, so the court understands if you need to purchase a car, but it has to be out of necessity.

Take your sample buyer’s order to your court-appointed trustee and explain why you need a car. They'll have you fill out some paperwork and decide if your choice is reasonable. Once this is completed, your trustee will weigh your need for the new debt against the potential impact that the new debt will have on your ability to pay your existing creditors. This is where you will see how important it is to select a modest and affordable car, as the trustee will probably object to an expensive vehicle purchase. They may even want to make some adjustments. If they approve you, they'll bring your motion before the court.

Step 4: Your Trustee Files a Motion with the Court

Your trustee will file what's called a Motion to Incur Additional Debt with the bankruptcy court. This motion will be sent to your creditors and any other interested parties, giving them a chance to object. Following this, you may need to attend a brief court hearing explaining further why you need the car. However, if no one objects to the petition, you may not need a hearing at all.

In the end, the court will either approve or deny the motion. They can also make specific requests related to your auto loan contract. For example, they can set a maximum interest rate or loan amount you're allowed to have.

Step 5: You Get Approved or Are Denied

The final step: the court makes their decision. If the petition is approved, you will present a copy of the court's order to the lender. You'll be given an Order to Incur Additional Debt to bring back to the dealership. Present the finance department with a copy of the order and you're free to move forward with the loan application and car buying process.

Be sure to follow these procedures. If not, you could have your chapter 13 plan dismissed, and you will have even more debt to deal with.

Getting Started

Being in an open Chapter 13 bankruptcy doesn't have to stop you from financing a car if you need one. Just make sure you know the steps to follow and understand how important it is to find the right dealership.Oftentimes, the hardest part of getting approved for a bad credit auto loan is finding a dealership that can help.

If you're having trouble finding a dealership that can work with your situation, Auto Credit Express wants to help. We're teamed up with a nationwide network of car dealers that are equipped to handle challenging credit situations. Our free service can connect you with one of them in your area.