Can You Get a Car Loan After Chapter 13

Can You Get a Car Loan After Bankruptcy?

Reviewed by Lauren Bringle

Life can bring about circumstances that are beyond our control. Losing a job, the death of a spouse, and other unexpected events can push people into such dire financial straits that bankruptcy may be the only way out.

If you're considering bankruptcy or just came out of one, you may wonder whether you can get a car loan, and if so, what your options are.

Yes, you can get a car loan after bankruptcy. In this guide, we'll show you how.

How to get a car loan after bankruptcy
How long after bankruptcy can I buy a car?
Average car loan interest rate after bankruptcy
Can you get a car loan after bankruptcy dismissal?
Where to look for a loan

How to get a car loan after bankruptcy

Getting approved for a loan after bankruptcy can be difficult. That's because your credit score is one of the primary factors lenders consider when deciding whether to loan you money, and bankruptcy negatively impacts your credit.

According to FICO®:

A bankruptcy will always be considered a very negative event by your FICO Score. How much of an impact it will have on your score will depend on your entire credit profile. Someone that had spotless credit and a very high FICO Score could expect a huge drop in their score. On the other hand, someone with many negative items already listed on their credit report might only see a modest drop on their score.

Despite this reality, it IS possible to get a car loan after bankruptcy if you follow these tips.

Focus on your credit score

Looking at your credit report and credit score after bankruptcy may be the last thing you want to do. However, potential lenders will be checking your credit, so it's a good idea to know what they'll find and correct any errors that might show up there. See our article about how to read your credit report.

Debts forgiven in bankruptcy are supposed to appear on your credit report with a zero balance and indication that they were discharged in bankruptcy, but sometimes creditors don't update the credit reporting agencies. When these debts continue to show up as currently owed, delinquent, or having a balance due, they can cause a lender to deny your loan application.

Order a copy of your credit report from each of the three credit reporting agencies (TransUnion, Experian, and Equifax) at https://www.annualcreditreport.com/ around three months after receiving your bankruptcy discharge and review every debt listed. If your reports show any improperly labeled discharged debts, take steps to dispute credit report errors.

Increase your down payment amount

The average down payment is just under 12% for a new car, and 10% for used cars, according to J.D. Power [1] J.D. Power. "What is a Down Payment on a Car?" https://www.jdpower.com/cars/shopping-guides/what-is-a-down-payment-on-a-car. But you may need to come up with a larger down payment after bankruptcy.

The lower your down payment, the more risk the lender takes on. If you put down a small down payment then default on the loan, there's a good chance you'll be upside down on the loan, meaning you owe more to the lender than the car is worth.

However, if you're able to come up with a larger down payment — 20% or more — this lowers the lender's risk and may make them more willing to work with you.

Compare lenders

Shopping around for your car loan gives you a chance to compare interest rates, fees, and loan terms, so set aside a day or two to apply for a loan with your bank, credit union and online lenders. You may think few lenders will be willing to lend to you, but don't take the first offer you receive.

Many lenders are willing to work with borrowers who've had past credit problems, and some even specialize in helping people with bankruptcies get access to financing. Shopping around to find the best offer can save you hundreds or even thousands of dollars over the life of the loan.

Consider a cosigner

A cosigner is a person who agrees to apply for the loan with you. Cosigners provide the lender with peace of mind when the primary borrower has less than stellar credit because the cosigner is equally responsible for making loan payments. If you miss payments or default on the loan, the lender will look to your cosigner for payment.

If you have trouble qualifying for a car loan or finding one with an affordable interest rate, you'll improve your odds if you have someone willing to cosign.

Cosigners typically need:

A credit score of 670 or better [2] Experian. "What Credit Score Does a Cosigner Need?" https://www.experian.com/blogs/ask-experian/what-credit-score-does-a-cosigner-need/
Enough income to pay back the loan in the event you default

How long after bankruptcy can I buy a car?

There are two types of bankruptcies for individuals in the U.S., and each type has different ramifications for getting a car loan.

After Chapter 7

A Chapter 7 bankruptcy involves liquidating all of your eligible property, using the proceeds to pay creditors, and discharging the remaining eligible debt. It's only available to people in such dire financial circumstances that they have no hope of repaying their debts.

A Chapter 7 bankruptcy stays on your credit report for ten years. However, the impact of that bankruptcy on your credit report will lessen over time, as new information is weighted more heavily in your credit score calculation than old information.

For that reason, it's best to work on rebuilding your credit after bankruptcy and waiting until your score improves before applying for an auto loan. According to FindLaw, it's possible to bring your credit from poor (under 579) to the fair range (580-669) within 12 to 18 months if you take the right steps [3] Findlaw. "How Soon Will My Credit Score Improve After Bankruptcy?" https://www.findlaw.com/bankruptcy/after-bankruptcy/how-soon-will-my-credit-score-improve-after-bankruptcy-.html.

After Chapter 13

A Chapter 13 bankruptcy is for people who have a regular source of income but are currently unable to repay their debts. Chapter 13 allows you to keep some assets while you work with a trustee on a plan to repay creditors over a three- to five-year period. Once you complete the plan, any remaining eligible debts are discharged. A Chapter 13 bankruptcy remains on your credit for seven years.

The trouble with a Chapter 13 bankruptcy is that it's a lengthy process. A Chapter 7 bankruptcy usually takes less than six months, after which point you can begin rebuilding your credit. A Chapter 13 bankruptcy, on the other hand, can take up to five years. Your credit score may gradually improve during that time, but not as quickly as it does after a Chapter 7 discharge.

If you need to buy a car during that time, the decision isn't yours alone. You have to request permission from the bankruptcy court, and your trustee will consider whether buying a vehicle is a necessity or a luxury. You may be able to get permission to take on a modest loan if you need a car to get to work. Otherwise, you're better off waiting until after you receive a Notice of Discharge.

Average car loan interest rate after bankruptcy

There's no official data on what your car loan interest rate will be after bankruptcy. After all, your credit score after bankruptcy depends on several factors, including how you handled credit before filing and how much time has passed. However, we can get some clues by looking at data from The Federal Reserve Bank of Philadelphia [4] The Federal Reserve Bank of Philadelphia. "CREDIT ACCESS AFTER CONSUMER BANKRUPTCY FILING: NEW EVIDENCE" https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2014/wp14-25.pdf and Experian [5] Experian. "State of the Auto Finance Market" https://www.experian.com/content/dam/marketing/na/automotive/quarterly-webinars/credit-trends/2020-quarterly-trends/v2-2020-q4-state-automotive-market.pdf.

	Chapter 7	Average Loan Rate		Chapter 13	Average Loan Rate
	Chapter 7	New	Used	Chapter 13	New	Used
Average credit score at time of filing	Chapter 7 < 560	Average Loan Rate New 10.58%	Average Loan Rate Used 16.56%	Chapter 13 < 540	Average Loan Rate New 10.58%	Average Loan Rate Used 16.56%
Average credit score one year after filing	Chapter 7 620	Average Loan Rate New 6.64%	Average Loan Rate Used 10.13%	Chapter 13 580	Average Loan Rate New 10.58%	Average Loan Rate Used 16.56%

Now, let's consider what that means in terms of the cost of financing your car purchase by comparing two different scenarios.

In Scenario A, you just completed a Chapter 7 bankruptcy, and your credit score is 550, which is considered Subprime by lenders. In Scenario B, it's been 12 months since your debt was discharged under a Chapter 7 bankruptcy and your credit score is 620.

In both scenarios, you apply for a $20,000 loan to finance a new car purchase on a 60-month loan. Here's how much buying now versus waiting one year would cost:

	Interest Rate	Monthly Payment	Total Interest Paid
Scenario A: 550 credit score	Interest Rate10.58%	Monthly Payment$430.67	Total Interest Rate$5,580
Scenario B: 620 credit score	Interest Rate6.64%	Monthly Payment$392.64	Total Interest Rate$3,558

By waiting a year until you build your credit score up to 620, you could reduce your monthly payment by almost $40 per month and save $2,022 in interest over the five-year loan term.

Can you get a car loan after bankruptcy dismissal?

A bankruptcy dismissal is different from a bankruptcy discharge. In a dismissal, the court closes your case before you receive a discharge, and you continue to be liable for your debts. Some people ask for a voluntary dismissal because they changed their mind or their circumstances changed. However, a court can also dismiss your case because:

You failed to file the right paperwork or disclose all of your income, assets, and debts
You don't pass the means test to qualify for a Chapter 7 bankruptcy
You don't complete the mandatory credit counseling
You fail to pay the court filing fees
You don't attend the mandatory meeting of creditors
You stop making payments according to your approved Chapter 13 repayment plan

Even a dismissed bankruptcy stays on your credit report for seven to 10 years, and you don't get the benefit of having your debts discharged. If you find yourself with a bankruptcy dismissal rather than a discharge, you will likely have trouble getting approved for financing, even from a subprime lender.

Where to look for a loan

When shopping for an auto loan after bankruptcy, it's a good idea to shop around before visiting the dealership.

Getting pre-approved before going to the dealership allows you to shop around for the best rate without the pressure of a salesperson hovering. It can also be an available bargaining chip once you get to the dealer. For example, if you're pre-approved at 7.5%, and the dealer says they can get you a rate of 6.9%, you may be wise to take it as long as the other terms are the same.

Here are a few places to look:

Banks and credit unions

Depending on your bank or credit union, you may be able to apply for preapproval online or at your local branch. If you don't know which car you want to buy yet, the bank or credit union will give you a quote and letter of commitment to take to the dealership. They may even give you a blank check good for an amount up to your preapproval limit.

However, if you plan on buying a used car, many banks and credit unions have limits on the age or mileage of the vehicle.

Car lenders

When you apply for financing at the dealership, the salesperson will have you fill out a credit application. They may send your application to several lenders or their captive financing company. See our related article about the pros and cons of buy here, pay here car dealerships.

You can get lower rates on a new car from a dealer than a used car in most cases. But don't get pulled in by the promise of zero-interest financing — those deals are typically only available to borrowers with excellent credit.

Bottom line

The best way to get a car loan after bankruptcy is to wait until you've had time to rebuild your credit so you can qualify for a lower interest rate. However, if you need a car now, shop around to get the best deal possible and be sure to make your monthly payments on time, which will help your credit rebuilding efforts. Once your credit is improved, you may be able to refinance for a lower rate.

Sources:

^[1] J.D. Power. "What is a Down Payment on a Car?" https://www.jdpower.com/cars/shopping-guides/what-is-a-down-payment-on-a-car
^[2] Experian. "What Credit Score Does a Cosigner Need?" https://www.experian.com/blogs/ask-experian/what-credit-score-does-a-cosigner-need/
^[3] Findlaw. "How Soon Will My Credit Score Improve After Bankruptcy?" https://www.findlaw.com/bankruptcy/after-bankruptcy/how-soon-will-my-credit-score-improve-after-bankruptcy-.html
^[4] The Federal Reserve Bank of Philadelphia. "CREDIT ACCESS AFTER CONSUMER BANKRUPTCY FILING: NEW EVIDENCE" https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2014/wp14-25.pdf
^[5] Experian. "State of the Auto Finance Market" https://www.experian.com/content/dam/marketing/na/automotive/quarterly-webinars/credit-trends/2020-quarterly-trends/v2-2020-q4-state-automotive-market.pdf

Janet Berry-Johnson

Janet Berry-Johnson is a Certified Public Accountant and freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Freshbooks, The Penny Hoarder, and several other major outlets.

Lauren Bringle

Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to increase economic inclusion by helping people build credit and savings.

Can You Get a Car Loan After Chapter 13

Source: https://www.self.inc/info/car-loan-after-bankruptcy/