Information in this article does constitute legal advice, is for informational purposes only and may not constitute the most up-to-date information. Readers should contact their attorney for advice to any particular legal matter.
If you've filed for bankruptcy and are considering getting a car loan, it's important to understand that the process is different depending on a variety of factors. These factors include the type of bankruptcy you filed, how much you owe on your car loan, the value of your vehicle, and how long you've owned it. There may be other factors to consider as well.
In this article, we'll answer some of the most common questions about auto loans and bankruptcy to help you navigate the process.
How Are Auto Loans Handled During a Chapter 7 Bankruptcy Case?
Chapter 7 bankruptcy is a type of bankruptcy that is available to individuals, businesses, and corporations who cannot afford to repay their debts. For individuals, there are income requirements that must be met to receive a bankruptcy discharge, which is a form of debt forgiveness. However, Chapter 7 bankruptcy does not offer a repayment plan.
If you are behind on your car payments and decide to file for Chapter 7 bankruptcy, you will have limited options for keeping your vehicle. You can catch up on the car payments immediately to keep the car, redeem the vehicle by paying a lump sum payment that is equal to the fair market value of the car, or enter into a reaffirmation agreement with the lender, which restructures the car loan. However, it is important to note that entering into a reaffirmation agreement means that the debt is not impacted by the bankruptcy case. If you fall behind on payments again, the creditor can take the car and seek a deficiency judgment.
A deficiency judgment is the amount you owe on the auto loan after the car is sold. In some states, creditors can garnish wages for deficiency judgments. If you surrender your vehicle in Chapter 7, the creditor cannot seek a deficiency judgment. Therefore, if you owe more on your car than it is worth, surrendering the car in Chapter 7 can get rid of the debt without the worry of a deficiency judgment.
How Are Auto Loans Handled During a Chapter 13 Bankruptcy Case?
If you're struggling to keep up with your auto loan payments, filing for Chapter 13 bankruptcy can be a helpful solution. Here are a few ways it can assist you:
Surrender Your Car in Chapter 13
So, you're considering surrendering your vehicle in Chapter 13? Well, the good news is that you can definitely do that! And once you complete your Chapter 13 plan, the creditor won't be able to ask the court for any more money or a deficiency judgment. It's a win-win situation for you!
Stop Repossession by Filing Chapter 13
If you are behind on your vehicle loan payments and facing the possibility of repossession, filing for Chapter 13 bankruptcy can help. This legal option can stop creditors from taking your car, and allow you to keep it by paying off the auto loan through a Chapter 13 plan.
One of the benefits of Chapter 13 bankruptcy is that it allows you to spread out the car loan payments over 60 months, even if you have been paying on the car for several years. This can lower the monthly payments and make it more manageable to keep the car.
It's important to note that filing for Chapter 13 bankruptcy can be challenging, and it's essential to work with a qualified attorney to ensure the process goes smoothly. However, if you are struggling to keep up with car loan payments, this legal option can provide much-needed relief and help you keep your vehicle.
Cram Down a Car Loan in Chapter 13
Did you know that you might be able to pay less than what you owe on your auto loan? It's called a cramdown, and it could help you release the lien on your car while also potentially reducing the interest rate. However, there are specific requirements you must meet to qualify for this option.
One of the main requirements is that you owe more on your car than what it's worth. For instance, if your vehicle is valued at $10,000, but you still owe $18,000 on the loan, you may be able to pay just $10,000 to own the car outright. To find out if you're eligible for a cramdown, consider speaking with a bankruptcy lawyer who can assess your case and provide guidance.
Can I Buy a Car with a Loan During Chapter 13 Bankruptcy?
Did you know that in some cases, you can get an auto loan while in Chapter 13 bankruptcy to purchase another vehicle? It's true! Since Chapter 13 cases typically last for over five years, the court understands that you may need to buy another car during that time. Maybe your current car broke down or your spouse got a job, and you need a second car for your family.
However, there's a catch. You need to get permission from the bankruptcy court to borrow money to buy a car while in Chapter 13. This means filing a petition with the court that includes all the details of the proposed loan and the car itself. The court will only grant permission for an auto loan if you can prove that you can afford to make the new loan payments while keeping up with your Chapter 13 plan payments. It's a bit of a process, but it could be a helpful option if you need a new car while going through bankruptcy.
When Can I Get an Auto Loan After Bankruptcy?
Good news! You don't have to wait to apply for a car loan after your bankruptcy case is closed. There's no waiting period required. However, getting approved for a car loan with a bankruptcy on your record can be a bit tricky. The bankruptcy will stay on your credit report for seven to ten years, depending on the type of bankruptcy you filed (Chapter 13 is seven years, and Chapter 7 is ten years).
If you can wait a few years before applying for a new car loan, it can increase your chances of getting approved. During this time, you can work on improving your credit score and saving up for a down payment. The longer you wait between filing for bankruptcy and applying for a car loan, the better your chances of qualifying for one.
Are interest rates affected negatively by filing bankruptcy?
Filing for bankruptcy can impact the interest rates on auto loans, leading to higher rates initially. Although some lenders may still offer you a car loan immediately after bankruptcy, you might have to pay a higher interest rate. But don't worry, with time, this problem can be resolved. Waiting for a year or two before applying for a new car loan can result in a lower interest rate. This is provided that you have been working to improve your credit score during that time.
So, while it may seem like a setback at first, filing for bankruptcy doesn't have to be the end of the road. By taking steps to improve your credit score, you can gradually rebuild your financial standing and qualify for better interest rates on car loans and other forms of credit in the future.
Buy-Here Pay-Here and No Credit Check Lenders
After completing your bankruptcy case, you may be tempted to use a "buy-here, pay-here" auto dealer or one that offers "guaranteed" or "no credit check" loans. However, while these dealerships do offer financing to individuals with bankruptcy on their credit report, the cost is often very high. The interest rate and loan terms are usually unfavorable, and you may end up paying more for the car than it is worth.
It's best to wait at least a year or two before applying for a car loan after bankruptcy. By doing so, you may qualify for an auto loan with a lower interest rate and better terms. Our blog posts "Life After Bankruptcy – Rebuilding Credit And Renting" and "How Long Does Bankruptcy Stay On Your Credit Report" offer tips on how to improve your credit score after bankruptcy.
Get Help Now to File a Bankruptcy Case
Struggling to pay off your debts? Filing for bankruptcy might be the solution you need. We can help you find a bankruptcy lawyer near you who offers a free bankruptcy consultation. To see if bankruptcy is the right path for you, get started now.
If you have any questions or concerns about bankruptcy or other debt-relief options, don't hesitate to contact us, our team is here to provide you with more information and guidance.