When filing for bankruptcy and making a fresh financial start, a car purchase is often part of the plans. Trustees and lenders recognize this and many people are able to get a car loan while in bankruptcy, or shortly after, depending on the type of bankruptcy for which they’re filing.
Car loans and Chapter 7 bankruptcy
Most likely you’ll be filing for Chapter 7 or Chapter 13 personal bankruptcy. Under Chapter 7, the debtor’s non-exempt assets are liquidated to pay creditors. The process normally takes four to six months from filing until debts are erased and the bankruptcy discharged, during which time there will be a 341 hearing with creditors about your case. While it may be possible to get a car loan while in Chapter 7 bankruptcy, you’ll generally have a better chance of approval, and potentially better terms, by applying after the bankruptcy has been discharged.
Reaffirming a car loan while in Chapter 7
If you’re filing for bankruptcy with an outstanding auto loan and would like to keep your car, a common option is to reaffirm the loan. Reaffirming a car loan is a legal agreement where you continue to repay the debt without it being subject to discharge through the bankruptcy proceedings. Lenders may require you to sign this agreement if you want to keep hold of your car.
Reaffirmation enables you to retain an interest rate and payments that may be lower than those you could get by taking out a new loan after bankruptcy, with the full effects of the bankruptcy on your credit history. If you miss payments on a reaffirmed loan after the bankruptcy is discharged, you’ll have to take the consequences, however. Should the lender repossess and resell the vehicle, you’ll be responsible for any deficiency balance and auction fees.
Auto loans during Chapter 13 bankruptcy
Chapter 13 bankruptcy involves a debtor with steady income agreeing to repay all or some of their debts over three to five years, and enables them to keep assets that may otherwise be lost to the bankruptcy process. With the permission of a court-appointed trustee, you’re free to seek a car loan while a Chapter 13 bankruptcy is open. Again, look for a lender willing to accept applications from someone in your position.
Considering the turbulent financial waters you’ve been through, if approved for an auto loan during or after bankruptcy you’ll typically receive a higher interest rate than a consumer with better credit, and there may be requirements like a minimum down payment. That’s par for the course.
Nevertheless, it’s possible for many people to get on the road with the help of a car loan in these situations as they continue to take control of their money and re-establish themselves. And there’s always the opportunity to apply for refinancing, and new loan terms, in future, too.†
* “Bad” or “Poor” credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association (reported by the Associated Press), Bankrate.com, Credit.com, Investopedia, NerdWallet.com and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. FICO scores are not the sole factor in lending decisions by RoadLoans.com and Santander Consumer USA.
† RoadLoans does not accept applications to refinance the loans of existing Santander Consumer USA and Chrysler Capital customers.