Taking on a new car loan while in bankruptcy Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial choices by offering you financial calculators and interactive tools as well as publishing quality and impartial content. We also allow you to conduct research and analyze information for no cost - so that you can make financial decisions with confidence. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are advertised on this site come from companies that compensate us. This compensation can affect the way and when products are featured on this site, including for instance, the order in which they may appear within the listing categories in the event that they are not permitted by law. This applies to our mortgage, home equity and other home loan products. However, this compensation will have no impact on the information we publish, or the reviews that you read on this site. We do not include the vast array of companies or financial offers that may be accessible to you. SHARE Westend61/Getty images
5 min read Published June 22, 2022
Written by Jackie Lam 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 late 2021. They are dedicated to helping readers gain confidence to take control of their finances through providing concise, well-studied information that breaks down otherwise complex topics into manageable bites. The Bankrate promises
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So, this compensation can influence the manner, place and in what order products are listed, except where prohibited by law. We also offer mortgage, home equity and other home loan products. Other factors, such as our own proprietary website rules and whether a product is available within the area you reside in or is within your own personal credit score can also impact the way and place products are listed on this website. We strive to offer the most diverse selection of products, Bankrate does not include details about every credit or financial item or product. If you file Chapter 13 bankruptcy -- also known as repayment bankruptcy credit score will be affected and it will remain on your credit profile for seven years. In Chapter 13 bankruptcy, you enter a repayment plan approved by the court, explains 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 repayment is made over a period of 3 to five years. This is not the time to start taking on additional debts," says Lins. "However, the court recognizes that life is unpredictable, and it may be necessary to buy vehicles prior to the conclusion that Chapter 13 repayment plan." It is possible to obtain an auto loan however, your options will be restricted. What is the best way to obtain a car loan when you are in Chapter 13 bankruptcy If you have enough cash to pay for an automobile, you may simply purchase a vehicle for cash without going through the court. However, you may need to modify your bankruptcy plan, so talk to your lawyer first. If you require a car loan while you are still on your repayment plan and before you're discharged from bankruptcy, it is possible to do so. Here are four steps to take, explains Lins. 1. Make a new budget showing that you can afford the cost of your car. You'll need to demonstrate that you can manage your debt repayment with additional financial commitments and responsibilities , as well as the payment for the car. "If the car purchase is going to impact other elements of your repayment plan, work with your lawyer to come up with an alternative payment plan" says Lins. 2. Find a lender who can work with Chapter 13 bankruptcies There are very few car dealers and lenders who will work with those in an active bankruptcy, but there are certainly some that will, says Lins. "Your bankruptcy lawyer may be able provide an inventory of lenders and dealers that will work with you, and you can inquire with your local credit union or bank." Additionally, as your credit score will suffer from bankruptcy, be prepared for higher interest rates, fees and less favorable terms. It is also necessary to locate a dealer who works with to get the car financed. Even though your options are slim, do your due diligence and compare rates and terms from several lenders. You should have the offer, including the purchase price, the monthly payment and interest rate in writing, to submit for the courts, according to Lins. "Keep the price of your purchase as low as possible and wait to exit bankruptcy and rehabilitate your credit before buying a larger vehicle," she says. 3. Make a motion to the court to purchase the car In order to take over the car loan while still paying back your debt and settling it, you'll have to submit a motion to the court to get it approved. This involves bringing in your request along with a clear argument for why you're required to buy a car and why you'll have finance for this. Perhaps your last car broke down and the repairs are so significant that financially it's more beneficial to buy a brand new car. Perhaps you reside in a place where public transit isn't easily accessible. This is something that your bankruptcy lawyer can help with. 4. Make the purchase after the motion has been approved by the court, you can then obtain your car loan and then get your car. Start paying the loan off along with other obligations. How to obtain a car loan after Chapter 13 bankruptcy Once you finish your court-ordered debt repayment and get released, you will not need to undergo the court process to get your approved. And, if you are able to, try to take advantage of your car until you're at six months after discharge, says Lins. Improve your credit score There are a variety of ways to improve your credit score get credit, one of which is using a secured credit card. Obtaining a secured credit card means the deposit of a small amount that acts as collateral. Your deposit becomes the credit line to credit cards. "Charging and paying smaller amounts over time will aid in building a positive credit history," says Lins. There are also companies that can 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 usually charge a modest fee, but some are completely free," she says. "Using your utility bills and rental payments to create credit history can be a good strategy to start the process of rebuilding." Check your credit. In addition to rebuilding your credit score, you'll want to keep tabs on it. This will let you know the progress you are making and the kinds of changes that can be made. Monitoring your credit frequently will help you identify any mistakes which could affect your credit score down the line. You can order free reports from AnnualCreditReport.com or sign up for a free credit monitoring service. A lot of credit cards offer an annual free look at the credit scores of your customers. Look around for an affordable car. Be sure to choose cars that are within the range of the budget you're able to comfortably afford to ensure that you are in good shape with your payment. This can in turn help rebuild your credit and keep you on the right track. Examine your expenses for the month to determine how much of a car loan your budget can allow. In general, car related expenses shouldn't exceed 20% of your budget for the month -- an amount that covers the cost of gasoline, maintenance and insurance. You might also wish to determine a budget for your purchase based on data available on websites like Edmunds and Kelley, which offer used and new prices for cars, and insurance cost estimates. Make a down payment The , the less you'll owe for it in the near future. Examine your budget and see the amount you can be able to save each month toward the purchase of a vehicle. It is ideal to save as much as possible but ultimately it comes to your income as well as your expenses and obligations. Alternatives to getting the new car loan If you're unhappy with the rates and terms that are offered with an auto loan or have difficulty getting your loan approved at all, consider other options. Looking for a cheaper car. Even if the rate of interest is high, your total payment and how much you owe each month will be lower. Be patient and pay off the loan later, once your credit is better. Once you rebuild your credit, you'll most likely be eligible for a larger range of car loans with lower rates of interest, fees , and better terms. You can pay cash in full. Saving up and paying cash outright for a car means that you don't have to apply for an auto loan for any reason and will be able to save in interest costs. But if you need to purchase a car earlier that later may require the loan . The bottom line is that getting an auto loan during Chapter 13 bankruptcy is possible. Find an lender who is willing to collaborate on Chapter 13 bankruptcies and create an appropriate budget that permits you to make debt repayments as well as pay for the car loan. It is also essential to shop around to find the best car for your budget. Once you've been released of bankruptcy, finance options also are available. But the primary goal is to restore your credit by setting up a track record of consistently making payments on time. "It's an old saying however, time does heal all wounds, even wounds to your credit score" says Lins. Find out more
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Written by the writer who contributes to the project. Jackie Lam is a contributing writer for Bankrate. Jackie write about automobile loans. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to control their finances with precise, well-studied information that break down complex topics into digestible chunks.
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