Bankruptcy Auto Loans

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Bankruptcy Auto Financing: The Basics

Going through a bankruptcy lowers your credit scores, but it can also give you a fresh start, financially. Once finished, you may think that it is next to impossible to get approved for credit again, but usually that is not the case. At Federal Auto Loan, we specialize in helping people get connected to local dealerships who know how to work through your unique credit situation. Many of our network dealers have loan options for all types of bad credit situations, including bankruptcy. With the second chance you need, you can get back on the road and on the way to rebuilding your credit.

Getting an Auto Loan after Bankruptcy: What You Need to Know

Following a setback like this, it can be difficult to build your credit back up, but getting a car loan after bankruptcy is possible. A bankruptcy car loan is actually a good way to help your credit recover once you’ve received a discharge. The process of getting a car loan following a discharged bankruptcy is fairly simple.

Just as you would with any other type of bad credit auto financing, you need to meet the lender’s requirements to qualify. Along with meeting the income, employment, and residency requirements most lenders look for, there are a few tips to keep in mind:

  • Check your credit – Make sure you check that the discharge shows up on your credit reports, check for overall accuracy, and view your credit score to see where you stand before visiting a dealership.
  • Amount matters – The less money you borrow, the easier it should be for you to get approved. A good way to keep costs low is to finance a used vehicle. Keep in mind that you’ll need a reliable vehicle, not just an affordable one.
  • Prepare a down payment – The bigger your down payment, the less you have to borrow. Subprime lenders typically ask for $1,000 down or 10 percent of the vehicle’s selling price, whichever is less.
  • Cosigners can be a big help – In fact, lenders sometimes require bad credit borrowers to have one. But, before you ask a friend or family member to put their credit on the line, be sure you both know what this means.

To be sure you don’t get turned away, make sure you bring your bankruptcy discharge paperwork with you when you visit a dealership: it could be a no deal if it hasn’t been reported to the credit bureaus yet. Another way to come up short with a car loan after bankruptcy is by trying to apply following a dismissal. If your bankruptcy isn’t complete, getting approved for a car loan typically has to wait until your credit has recovered by other means or the dismissal drops off your reports: which could take up to seven years.


If you’re in an open bankruptcy and need an auto loan, it’s still possible to get one, but the process is far different from getting a car loan after discharge. Depending on whether you’re in a Chapter 7 or a Chapter 13, you’ll have to follow a different set of rules.

About Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is considered a liquidation bankruptcy. This means your nonexempt personal assets can be seized and sold in order to pay off your debts and provide you with a fresh start. A Chapter 7 bankruptcy is relatively quick, and typically lasts only three to six months before being discharged, but, unfortunately, the bankruptcy filing stays on your credit reports for up to 10 years.

Getting an Auto Loan with an Open Chapter 7 Bankruptcy

Getting an auto loan with an open Chapter 7 bankruptcy is not impossible, but it is rare. You are able to apply for a car loan once the 341 meeting with your creditors has taken place, but the chances of approval will not be high. Because lenders know an open Chapter 7 bankruptcy lasts for a relatively short amount of time, they’ll advise that you to wait until it’s been discharged.


Getting a Car Loan after Chapter 7 Discharge

So, when is the best time to finance a car when dealing with a Chapter 7 bankruptcy? The best time would be once it has been discharged. Lenders wait until this point because they want to make sure the car loan won’t be included in the bankruptcy. It’s a good decision to wait anyway, because adding more debt may put you in a bind, financially. So, before you head to the dealership to apply for a subprime auto loan, make sure you have the official discharge papers on hand.

About Chapter 13 Bankruptcy

If you file for Chapter 13 bankruptcy, you set up a repayment plan, of either three or five years, in which you pay back all or part of your debts. This happens under the court’s protection, so you pay a fixed amount, monthly, to your bankruptcy trustee, which is then distributed amongst your creditors. The biggest advantage of this type of bankruptcy is that you have the opportunity to retain your property and assets. A Chapter 13 bankruptcy filing stays on your credit reports for up to seven years, but there are auto loan options that you can explore both during and after it.

Getting an Auto Loan with an Open Chapter 13 Bankruptcy

Unlike a Chapter 7, lenders are typically more open to Chapter 13 bankruptcy auto loans. The payment plan lasts for three to five years so it’s not uncommon to need a vehicle before the repayment plan is up, which is why there’s a process in place for you to follow. Here are the steps to getting a car loan during an open Chapter 13 bankruptcy:

 
  • Get a sample buyer’s order – The first step is finding a dealership with lenders that are capable of working with an open Chapter 13 bankruptcy. You need to get a sample buyer’s order from one of these special finance car dealers. This lists the details of your potential car loan – year, make, and model of the vehicle, loan amount, interest rate, etc. – for the court to review. Make sure the dealership lists “or similar” next to your car choice and includes the highest possible interest rate you might receive. If the vehicle is no longer there or you only qualify for a higher rate than what’s listed, the court can render your motion invalid, and you’ll have to start the process over.
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  • Take it to your trustee – Next, you can take your sample buyer’s order to your bankruptcy trustee and explain the reasons you need a car. They’ll weigh the loan’s potential impact on your repayment plan and determine if it’s acceptable or not.
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  • The Motion to Incur Additional Debt – Your bankruptcy trustee then files a Motion to Incur Additional Debt with the court. The motion is sent to the creditors involved in your repayment plan. They’re given the chance to object, and there’ll be a hearing that you may need to attend.
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  • The Order to Incur Additional Debt – The bankruptcy court makes a decision, giving you an Order to Incur Additional Debt if they approve the motion. The court can also make specific requests related to your car loan, such as setting the maximum amount for the loan, monthly payment, and interest rate.
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  • Finish up at the dealership – Finally, you can take the court order back to the dealership. All that’s left to do is finalize the terms of your loan with the dealership’s finance department.

Getting a Car Loan after Chapter 13 Discharge

The Chapter 13 bankruptcy auto financing process is more streamlined when you have your discharge papers in hand. All you have to do is apply with a dealership that is able to assist car buyers after bankruptcy. They’ll send your loan application to a lender (or lenders) for a loan decision. Similar to bad-credit car loans, these lenders set the acceptable terms of your loan, and you’ll be able to select from vehicles in the dealership’s inventory that you qualify for.

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