Buying a Car After Bankruptcy
After the unpleasantness of bankruptcy proceedings is finally over, a sobering question may arise: What if I need to buy a car?
There’s good news: It’s possible, especially if the debts your bankruptcy filing has lifted enable you to pay in cash or be able keep up with new loan payments.
Yes, auto loan lenders don’t exclude those who have gone through bankruptcy. However, you’ll pay higher interest rates if you finance the vehicle after receiving a bankruptcy discharge.
A better question to ask yourself is: How can I get a car that doesn’t overextend my budget financially, which is what brought on the bankruptcy in the first place?
How Long after Filing Bankruptcy Can You Buy a Car?
While the effects of bankruptcy hang around for 7 to 10 years on your credit report, that’s not how long you must wait to borrow money. The impact of the penalty decreases each year, and it’s even possible to get a car loan within six months of your discharge.
But that might not be the wisest course of action. The longer you can go without buying a vehicle, the more time you have to improve your credit score, which increases the likelihood of getting a loan at an affordable interest rate. One option: Help yourself out by getting a free copy of your credit report and checking it closely for errors so they can be removed.
If you need a car now, do you have enough cash to buy an inexpensive one to get you through the first 6 to 12 months? It may not be something you’ll be proud to be seen in, but it will give you time to improve your credit score and save for a down payment, both of which will help you get better interest rates on your next car.
Getting a Car after Chapter 7
If yours was a Chapter 7 bankruptcy, that usually takes 4 to 6 months to complete. You should receive notice of your discharge roughly 90 days after your 341 meeting of creditors. After you get this notice, you can get a loan for a car. However, it’s still better to wait so you can improve your chances of being approved for a loan with better rates.
Getting a Car during or after Chapter 13
Chapter 13 bankruptcy is different because, unlike Chapter 7, it’s a 3- to 5-year process designed to let debtors get caught on their loans. While you’re in Chapter 13, you must get permission from the bankruptcy court to buy a car. It’s a good idea to check with your bankruptcy attorney before doing so.
Once your bankruptcy is discharged, you can buy a car without anyone’s permission. The same suggestion applies: The longer you put off such a purchase, the likelier it will be that your interest rate will be less punitive.
Should You Pay with Cash or Credit for a Car after Bankruptcy?
Assuming you’re able, paying with cash is almost certain to be cheaper even if you have a good credit rating, which you certainly do not soon after a bankruptcy. With your old debts discharged, saving the money you would have paid on those old loans and credit cards might allow you to put together enough money to get a car without borrowing again.
Financing a car after bankruptcy will be more difficult, but it’s still possible.
Financing a Car after Bankruptcy
You may have already received letters from car dealerships offering you credit to buy a car, and it’s true. You should be able to get a car loan.
Should you? Think it through.
On the plus side: If you make consistent, on-time payments. A loan is a step for you to re-establish your creditworthiness. If you don’t have the cash needed to buy a car outright, financing may be your only option.
The flip side: Offering you credit doesn’t mean offering you good credit. Expect high interest rates – maybe really high rates. Shop around and see what dealers or lending institutions are going to charge you.
Where to Look for a Good Car Loan after Bankruptcy
Immediately after a bankruptcy, it won’t be easy to get a car loan. Your best bets:
- The bank or credit union where you’re already a customer. Since your accounts are with them, they may treat you differently from someone walking in off the street.
- Bad credit auto lenders. Some car lending companies specialize in working with customers with bad credit. Again, you won’t get great rates, but this can still work for you if it fits inside your budget. Check whether having a cosigner – preferably one with excellent credit – would lead to a lower interest rate.
- Swap leasing. This involves taking over someone else’s lease and payments from them. You pay what’s left on the car and they escape a loan that isn’t working for them. Of course, read the terms closely and check out the vehicle before the exchange to make sure it’s worth buying.
Tips on Buying a Car after Bankruptcy
If you’re going to buy a car following bankruptcy, there’s a lot more to consider than gas mileage and how it corners.
- Make sure your credit reports are up to date. Following Chapter 7 bankruptcy, your debts should all be discharged, but if your credit report didn’t get the memo, it could lead to even more credit problems. You should dispute mistakes on your credit report with the major credit reporting agencies to have them fixed.
- Work to rebuild your credit. If you have any loans not settled in the bankruptcy, be sure to pay them on time. Getting a secured credit card, which requires a cash deposit, is a tried-and-true credit rebuilder if you pay on time and keep the balance below the card’s credit limit. Paying on time is true for all your loans, including a car loan if you can’t buy with cash.
- Get a vehicle that fits your budget and transportation needs, not your ego. When you’re in better financial and credit shape, you can splurge on the car of your dreams. This isn’t that time. Make sure you can afford it. Know how much you can put down and how large a monthly payment you can comfortably handle.
- Get a fixed interest loan rather than anything that’s adjustable. Certainty is your friend. A loan that might increase your monthly payments in the future, is risky.
- Don’t finance for longer than 5 years. Longer terms lower monthly payments, but you pay much more interest the longer you finance it.
Have More Questions? Get Help from Financial Professionals
Credit counselors from a nonprofit credit counseling agency, provide advice on budgeting, money management and other finance basics. They can help people who want to buy a car after bankruptcy make sound decisions. And, if you are considering bankruptcy but haven’t filed, counselors can explore the alternatives – your situation may not be as bleak as you think – or assist with pre-bankruptcy credit counseling.
No matter which side of the bankruptcy questions you’re on, you don’t have to go through this alone.
About The Author
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].