One of the most frequently asked questions we get in the office is related to buying a car after bankruptcy. In this article we tell you everything you need to know about it.
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Everything you need to know about buying a car after bankruptcy in 2022
A bankruptcy process is draining. And, once discharged from bankruptcy, customers are looking to get back to normal as quickly as possible.
If you are wondering if you can buy a car or acquire a mortgage for a home after bankruptcy, the answer is yes. Of course you can, you just need to pay attention to a few important points. So, keep reading this article. We will go point by point highlighting what to look out for and how to proceed correctly.
- Once your bankruptcy is approved, you begin a period of zero consumer debt. This is one of the ultimate goals of filing bankruptcy.
- After this process, your credit score is very weakened, one of the main consequences of bankruptcy.
- Your low credit score will make it difficult for you to obtain financing, which is not an easy task after going through bankruptcy.
- The points you should consider when buying a car after bankruptcy will depend on which chapter your bankruptcy was filed under, either Chapter 7 or 13.
But before answering these issues, let’s look at the magic question: How long after bankruptcy can you buy a car?
Note: Find out how to file for bankruptcy in New York here
How long should I wait before buying a car after bankruptcy?
The judge approves your bankruptcy. After that there is no definite time you must wait to apply for a car loan or mortgage. However, it is recommended that you wait until you are discharged from bankruptcy, which will depend on what chapter you filed under.
- After a bankruptcy your credit score is devastated and diminished.
- It probably won’t be that difficult to get a lender, but it will be difficult to get credit rates that are convenient.
How long should I wait?
- It is recommended that you wait four to six months before applying for a car loan.
- In the meantime, you can take care of rebuilding your credit. Check out some actions to improve your credit score in the USA.
- Remember that having a better credit score will not only help you get approved for credit, but also help you get a better interest rate for it.
Also, you should know that the bankruptcy will continue to appear on your credit information for the next 10 years. But you won’t have to wait that long to buy a new car, as the “weight” of the penalty will decrease over time. However, it is common for the lender to want to charge you a higher interest rate or require a higher down payment to compensate for the risk.
If you are offered reasonable financing to buy a car once the bankruptcy is discharged, take it with caution. Be sure to pay on time, as this can help improve your credit score.
How to improve your weakened credit score
Lenders won’t go like bees to honey to offer you a car loan after going through bankruptcy. Especially with a totally weakened credit score.
However, if the loan applicant has a stable income and a substantial credit score, many car dealers will consider overlooking the past bankruptcy. Therefore, it is important to take some simple actions that can help you improve that score.
Review ways to improve your credit score below:
- Pay bills on time. We take it for granted, but this is a key point when it comes to cultivating a credit score. Meeting payment deadlines accounts for one-third of your credit score. Even paying the minimum amount can make a difference if you don’t have the full amount.
- Use of the credit line. It really matters how much of a credit line you use. Be aware of how much your balance is in relation to your credit limit. The closer you are to the credit limit, the lower your credit score will be.
- In-depth inquiries. Lenders or financial institutions that issue credit cards may make extensive inquiries. They need your authorization to do so. Your credit score may be affected the more inquiries that appear on your report.
- Credit history. Length of credit history is a confidence builder. If you don’t already have credit you should consider opening a small line of credit. This could improve your score quickly.
Note: If you have filed for bankruptcy, you are probably wondering how it affects your spouse or children. Check here how bankruptcy can affect your spouse.
Chapter 7 or 13 Bankruptcy? Check to see if you can buy a car and what the requirements are
As an individual, filing for bankruptcy can be through Chapter 7 or Chapter 13. Both bankruptcies differ in the method they use and whether you have the means to repay the debt. In that sense, in order to choose between one or the other it will be crucial to know your income level.
Both Chapter 7 and Chapter 13 will help you repay the debt. Chapter 7 does it through liquidation of assets, while Chapter 13 does it through reorganization.
Note: Both methods will significantly lower your credit score.
Learn everything related to the differences from bankruptcy Chapter 7 vs 13.
Chapter 7 Bankruptcy and Buying a Car
Chapter 7 bankruptcy is called liquidation bankruptcy because the court liquidates or sells all of your (non-exempt) assets in order to discharge debts.
- The court liquidates your assets.
- Liquidation of assets pays creditors and lenders.
- Personal property, clothing, household, retirement savings are exempt. Check here our article on asset protection
- How long does the process take? It can take three to six months from the filing of the bankruptcy forms to the discharge of the debt.
- How much does the process cost? The bankruptcy court filing fee is $338. If you earn less than 150% of the federal poverty line and file a petition, you may qualify for an exemption.
- A Chapter 7 bankruptcy may appear on your credit reports for up to ten years after filing.
Additional requirements may be requested by the lender
One of the debts that are wiped out by filing Chapter 7 bankruptcy is the car loan. This can create some reluctance on the part of lenders when you want to re-apply for credit to buy a car. Therefore, it is advisable to wait until you have all the bankruptcy discharge documents.
And, once the process is finished, which can take up to six months, you will certainly be able to access financing. However, this will most likely be with a subprime lender that caters to those with bad credit.
Considering that you have bad credit as a result of the bankruptcy, the lender will want to make sure you are going to pay and will evaluate some additional factors. While these requirements depend on each lender, they can help ensure that you qualify for the loan. Thus, the lender will know immediately what your ability to repay is when acquiring a car loan.
The most common requirements to be evaluated are:
- Proof of income;
- Landline phone;
- Current cell phone;
- A list of at least five complete personal references;
- The ability to make a down payment to qualify for a loan. This is typical for borrowers with bad credit.
Chapter 13 bankruptcy and the possibility of buying a car
Filing for Chapter 13 bankruptcy is known as the wage-earner plan. It is a reorganization that allows people with regular income to create a plan to pay part or all of their debts.
- It consists of a court-ordered plan for the person filing for bankruptcy to repay his or her debts.
- It is for people with a certain level of income or assets.
- The debtor proposes a plan to pay his creditors in installments over 3 or 5 years. The duration of this plan will be determined by a court considering the debtor’s income.
- This payment plan is based on court mandated budgets which in turn follow IRS guidelines.
- In general, the majority (two thirds) of Chapter 13 bankruptcies are converted to Chapter 7.
- How much does the process cost? The filing fee is $335.
- A Chapter 13 bankruptcy can appear on your credit reports for up to ten years after filing.
Buying a car after a Chapter 13 bankruptcy
As we said earlier, Chapter 13 bankruptcy is a reorganization. It is a court-ordered plan that allows people who have regular income to repay their creditors or lenders within 3 or 5 years.
While under a court-ordered Chapter 13 repayment plan, you can buy a car. That is, as long as the Court gives you approval. Along those lines, you may also be able to obtain a loan to finance it.
However, you should be aware that the interest rates may be punishing and not at all favorable considering that you will have a bad credit score. Although a viable and somewhat more advantageous option for you would be to pay for the car in low-cost cash, as you will not be faced with applying for credit.
Can a person buy a car after a Chapter 13 bankruptcy?
Some points to keep in mind:
- Yes, you can.
- It is best to wait until the process is over, because if you are still in the payment plan process, you will need court approval.
- Like Chapter 7 bankruptcy filers, Chapter 13 filers tend to have bad credit scores and therefore are considered high risk by lenders.
- Given their low credit score after bankruptcy, they will have higher interest rates.
- One way to bypass their bad credit is to buy the car with cash or seek other financing alternatives.
Buying a car after bankruptcy: step by step
Let’s look at some tips before buying a car after bankruptcy.
Improve your credit score
- Your credit score will be a key factor when it comes to choosing a financing loan.
- This score will increase as time goes by, once you improve your credit score after bankruptcy.
- However, in case you do not have time to wait for it to increase and ask for a loan, since you need the car immediately, there are some actions you can take to speed up the process.
- To repair your credit you can hire a credit recovery service. Or you can also do DIY credit correction on your own.
Find the right credit for your finances
Immediately after bankruptcy, it will be difficult to obtain credit. Lenders will see you as a high-risk borrower with a low credit score. And in the event that lenders consider giving you credit for an automobile, it will likely have high interest rates.
It may be difficult to qualify for good credit from lenders, but you should know that this is not the only option. There are sure to be other alternatives that are more suited to the financial condition you are in after the bankruptcy process, whether you filed for Chapter 7 or 13.
Other alternatives to consider:
- Your bank or credit union. If you have been a customer of a bank or credit union for a long time, chances are there are credit options there. They will most likely be willing to work with you, since all of your other accounts are with them. This alternative would be in honor of loyalty.
- Lenders dedicated to customers with bad credit. One of the main consequences of going through a bankruptcy process is that your credit score is heavily affected. And that undoubtedly affects your case when it comes to taking out a loan to buy a car or even for a mortgage. However, there are lenders that focus especially on those with bad credit. These are generally auto companies that are willing to take on more risk and may charge you more to lend. When looking for these types of lenders, make sure they are auto credit lenders.
- Swap leasing. This type of lease refers to when you take a lease from a third party and then take over the payments. Under this scenario, you only have to pay what is left to pay for the car. In this scenario, read all the terms and conditions carefully. Also, check the car inside and out before making the exchange.
- Co-signer. Another alternative is to have a third party with a good credit score co-sign a car loan. If you decide on this option, explain to people what rights you have as a co-signer. In this case, you should make it clear to the co-signer that if you do not repay the loan, he or she will be responsible for the payments.
Helpful tips for getting the best credit terms to buy a car after bankruptcy:
Make a down payment on the car you want to buy
You may not have had much money saved up when you filed for bankruptcy, but if you did you can exempt over 10K in cash that you could use as a down payment. If you have access to money, consider making as large a down payment on the car as possible.
- In case you have been able to keep your car, you are at an advantage, since you could give it as part of the payment. And if you have cash on top of that, consider putting it down as well.
- The larger the down payment, the less you will have to borrow at high rates.
- The more money invested in the car, the better the credit risk.
- If the interest rate on the loan is in the double digits, it’s best to do a cash deal.
Get a guarantor with good credit
A co-signer with good credit can make up for your bad credit. Plus, it can help you get a lower interest rate and qualify for a better loan.
Don’t rely on hidden fees and add-ons
People with bad credit and a bankruptcy on their credit history are desperate to get a loan.
- Beware of extravagant and expensive extras included with loans.
- If you are about to accept a car loan, make sure the lender isn’t adding add-ons you don’t need in order to increase its own profits.
- Don’t rely on credit where you are asked to pay a fee in addition to the down payment.
- No wire transfer requests.
Make sure it is a fixed payment loan
Forget and avoid having your car loan say “contingent,” “adjustable” or “conditional.”
- Check that the loan has fixed payments until the loan is paid off, so it will be easier to manage
- Exclude any variable clauses that could change the payment schedule in the future.
Buy a car you can afford and consider a used car
Avoid going through the bankruptcy process again and make sure you buy a car you can afford. Consider the alternative of a used car.
- Analyze your current financial situation and be realistic with the loan amount you are committing to.
- Be honest. A new, zero-mile car is probably not what you need right now when you are trying to rebuild your credit.
- Remember, too, that new cars lose 20% of their value once you leave the dealership. And it doesn’t stop there, the drop continues for the first two years of ownership.
- Calculate that the monthly amount you are going to pay for the car loan should not exceed 15% of your total take-home pay. This will be a good way to adjust to your current financial situation.
Questions and answers about can I buy a car after bankruptcy?
- What happens to my credit score after bankruptcy?
Credit score is one of the main consequences of filing bankruptcy. Your credit score decreases and is completely weakened. However, it can recover over time.
- Can I still get a loan after bankruptcy?
Yes. It may be more difficult than before bankruptcy. Because you have a low credit score, lenders will consider you a high-risk borrower. Therefore, they may offer you higher interest rates or a higher down payment to compensate.
- Will I get a loan if I filed for Chapter 7?
Yes, the Chapter 7 bankruptcy process is faster. Therefore, you may be able to recover your credit score at a faster rate.
- Will I be able to get a loan if I am in a Chapter 13 repayment plan?
Not if you are in a repayment plan that lasts 3 to 5 years. In that case you would have to apply for court approval. If you have the cash and do not need to take out a loan, you could purchase the car without any problem.
- Is it possible to get a loan after Chapter 13 bankruptcy?
Yes. Just like someone filing for Chapter 7, you will be considered a higher risk borrower. This will cause interest rates to be higher.
- How long will the bankruptcy appear on my credit history?
For both Chapter 7 and Chapter 13 filers, the bankruptcy will appear for 10 years on your credit report from the date of filing.
Why hire the attorneys at Ortiz & Ortiz?
You will probably need some time to repair your credit. However, we have seen throughout this article that it is more than possible. And you may have also noticed that you will be able to buy a car after bankruptcy.
Our New York business lawyers can review your case and analyze your options:
- They will let you know how your credit situation is after bankruptcy.
- Based on the above, they will guide you through the process of rebuilding your credit.
- In addition, in the process, they will assist you in your relationship with the auto lenders so that they treat you fairly.
For these and other services, please contact us today.