Taking on a new car loan while in bankruptcy Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make smarter financial decisions by offering you interactive tools and financial calculators as well as publishing quality and impartial content. This allows you to conduct your own research and compare information for free - so that you can make sound financial decisions. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site are from companies that pay us. This compensation may impact how and where products appear on this website, for example for instance, the order in which they appear in the listing categories in the event that they are not permitted by law for our mortgage home equity, mortgage and other home loan products. However, this compensation will have no impact on the information we provide, or the reviews appear on this website. We do not contain the universe of companies or financial offers that may be accessible to you. SHARE Westend61/Getty images
5 min read Published June 22, 2022
Writer: Jackie Lam Written by Contributing writer Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to manage their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites. The Bankrate promise
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So, this compensation can impact how, where and when products are listed in the event that they are not permitted by law. We also offer loan products, such as mortgages and home equity and other home lending products. Other factors, such as our own rules for our website and whether or not a product is offered in your area or at your own personal credit score could also affect the manner in which products are featured on this site. While we strive to provide a wide range offers, Bankrate does not include details about each credit or financial products or services. When you file Chapter 13 bankruptcy -- also known as repayment bankruptcy -- your credit will take a hit and it will remain on your credit report up to seven years. When you file Chapter 13 bankruptcy, you enter a repayment plan approved by the court, says Amy Lins, vice president of enterprise learning at , an agency for credit counseling that is non-profit that is based in Sugar Land, Texas. "This payment is spread over a period of 3 to five years. This is not the time to start taking on more debt," says Lins. "However the court does recognize that life can change and it could be necessary to purchase an automobile prior to the end of the Chapter 13 repayment plan." It is possible to get an auto loan however the options are limited. What is the best way to obtain a car loan when you are in Chapter 13 bankruptcy If you have the cash to purchase the purchase of a vehicle, you could simply purchase a vehicle for cash without going through the court. However, you may need to alter your bankruptcy schedule and consult with your lawyer before making any decisions. If you require an auto loan even though you're on the repayment plan and before you're discharged from bankruptcy, you may be able to do so. There are four steps you can follow, according to Lins. 1. Create a new budget to show that you can afford the car loan. You'll have to demonstrate that you can juggle your debt repayment, the other obligations of your financial life and obligations, and the cost of your car. "If the car purchase likely to affect other aspects that you are able to repay, you should work with your lawyer to develop a new payment plan" says Lins. 2. Find the lender who will accept Chapter 13 bankruptcies There are few lenders and car dealers who will work with those with active bankruptcy however, there are a few who will, according to Lins. "Your bankruptcy lawyer may be able provide a list of dealers and lenders that are willing to work with you and you can inquire with your local bank or credit union." Also, since your credit score will take a hit from bankruptcy, you can expect to pay more expensive interest rates, higher fees and terms that are less favorable. Also, you'll need to find an auto dealer that works with to get the car financing. Despite your options being slim take your time and compare rates and terms from a few different lenders. You should have the offer with the purchase price, monthly payment and interest rate, in writing to provide to the court, according to Lins. "Keep the cost of the purchase as low as possible and wait to exit bankruptcy and rebuild your credit prior to purchasing a more expensive vehicle," she says. 3. File a motion with the court to buy the vehicle. to pay off the car's debt while still repaying your debt, you'll need to make a motion to the court to have it approved. This requires bringing your application and having a solid justification for the need to purchase a car and why you'll have to get financing to do so. Maybe your previous car broke down, and the repair costs are so substantial that it's more beneficial to purchase a brand new vehicle. You reside in a place that public transportation isn't easily accessible. This step is something your bankruptcy attorney can assist with. 4. Complete the purchase Once the purchase is accepted by the court, you will then be able to obtain your car loan and then get your car. Make the purchase and begin paying the loan off along with other obligations. How to get a car loan after Chapter 13 bankruptcy Once you finish your court-ordered debt repayment and get discharged, you don't need to undergo the court process to be approved. And, if you are capable of it, you should make do with the car you have until you are at least six months post discharge, says Lins. Improve your credit score There are several ways to get credit, one of which is using secured credit cards. A secured credit card involves the deposit of a small amount that acts as collateral. Your deposit becomes the credit line for your credit card. "Charging and paying smaller amounts over time will aid in building your credit history in a positive way," says Lins. There are also services that will report rent as well as other bills like cell phones and utilities, and streaming services that can help you create or maintain an on-time payment history, says Lins. "These services typically have an affordable fee, however certain are completely free," she says. "Using your rental and utility bills to create credit history can be a great way to jump-start the rebuilding process." Check your credit. Besides repairing your credit score, you'll be able to monitor it. This will let you know the progress you're making and what kinds of improvements could be made. Monitoring your credit on a regular basis can help you spot errors that can ding your score in the future. You can order free reports from AnnualCreditReport.com or sign up for a free credit monitoring service. Many credit cards also offer a free monthly look at how your score on credit. Shop around for a car in your budget Making sure to shop for a car that's within the realm of the budget you're able to comfortably afford to ensure that you are on top of your payment. This can in turn aid in rebuilding your credit and ensure that you are on the right the right track. Examine your monthly expenses to determine the amount of a car loan your budget can allow. In general automobile-related expenses shouldn't exceed 20% of your monthly budget -- a threshold that includes the cost of gasoline maintenance, insurance and gas. It is also possible to establish a price target for your purchase using information on the internet via websites like Edmunds and Kelley, which provide used and new car prices, along with estimates of insurance costs. Make a down payment The greater the amount, the less you'll be liable on it in the near future. Look at your budget and figure out how much you can reasonably be able to save each month toward buying a vehicle. It is ideal to save as much as possible but ultimately it comes to your income expenditures, obligations and current obligations. Alternatives to obtaining a new car loan If you are unhappy with the terms and rates offered for the car loan or you are having difficulties getting it approved you should consider alternatives. You can look for a car that is less expensive. Even if the interest is high, your overall amount of payment and the amount you owe each month will be less expensive. Be patient and pay off the loan later, once your credit has improved. Once you rebuild your credit, you'll most likely qualify for a wider variety of auto loans with lower rates of interest, charges and better conditions. You can pay cash in full. Saving money and paying directly for your car means you won't have to apply for an auto loan for any reason and will be able to save on interest charges. If you require an automobile sooner rather then later might require a . The bottom line is that getting an auto loan during Chapter 13 bankruptcy is possible. Find an lender that is willing to collaborate with Chapter 13 bankruptcies and create a reasonable budget that allows you to continue debt repayments as well as pay for an auto loan. It's also important to search around for the best car for your budget. After you are discharged in bankruptcy, options for financing also exist. However, the initial step to take is restore your credit score by creating a track record of consistently making debt payments punctually. "It's an old saying, but the truth is that time heals all wounds, including wounds to your credit score" says Lins. Find out more
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Written by Contributing writer Jackie Lam is a contributing writer for Bankrate. Jackie write about automobile loans. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain the confidence to take control of their finances through providing concise, well-studied and well-researched content that break down complex subjects into bite-sized pieces.
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