Bankruptcy may seem like financial death, but it is more of a rebirth. This rings especially true when it comes to getting a car loan after filing for bankruptcy. To help guide you through this process, we’ll first take a look at the different types of bankruptcy, then give you an idea of what to expect when attempting to get a car loan.
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There are two types of personal bankruptcy—Chapter 13 and Chapter 7. In Chapter 13, the court appoints a trustee who sets a payment schedule that the debtor must follow for the length of the bankruptcy—typically three to five years. Chapter 7 liquidates a debtor's assets and distributes the money to the lenders of secured debts.
Chapter 7 bankruptcy includes a procedure called a 341 meeting. It is at this meeting that the court-appointed trustee affirms the value of the debtor’s assets and confirms the information contained in the schedule of debts. Getting the 341 meeting over with is essential for getting a car loan. Lenders will not even consider giving you a loan if this meeting has not taken place.
In a Chapter 13 bankruptcy, the court-appointed trustee has the control, so if you want to apply for a car loan you need to get the permission of the trustee. Keep in mind, it can take as long as a month to get a letter permitting you to purchase a car.
Finding a Car Loan after a Bankruptcy Has Been Discharged
Compare Rates Online
One of the easiest ways to find a car loan after your bankruptcy has been discharged bankruptcy is to go online. You can find a wealth of information on the Internet, and there are many sites devoted to mass submission of your information to lenders too. These sites are great because you fill in your information one time and the site will submit the information to many different banks. This allows the banks to compete directly with each other for your business, and you never have to leave the comfort of your home, saving you time too.
Expect Higher Rates
With a bankruptcy on your credit report, you become a much higher risk to the banks who loan for new cars. This is a small price to pay considering you have already filed for bankruptcy and had all of your debts discharged. The rates you pay with a bankruptcy run anywhere from 15 to 20 percent, which is significantly higher than the average car-loan rate. Banks might offer lower rates—even for bankruptcies—if they have a relationship with you already. The rates will still be higher, but going through a bank you have established yourself with, can save you a few points. Over the course of the loan, this can translate into several hundreds of dollars in savings.
Be Realistic in Your Car Choice
A bank is not going to offer you a loan for an $80,000 vehicle after a bankruptcy. In many cases, you are looking at getting financed for amounts under $15,000, which means you should forget about that luxury SUV you were hoping for. Luckily, in today’s world, $15,000 will get you a reliable car that will serve its intended purpose. After a few years, you can look at trading in the basic car for something closer to what you were hoping for. But for now, understand that unless your dream car is a subcompact, you will likely have to settle for your second or third choice.
Expect to Put More Down
The more money you have to put down on your car, the higher the chances are of getting a loan, even with a bankruptcy. This shows the bank that you are serious about your investment. The higher the down payment you make, the more you have invested in it. The bank sees this as a positive since you are probably not going to want to just throw that initial investment away. Whatever car you choose, plan on putting at least 20 percent, or more, down.
Though it is far from ideal, having a bankruptcy on your credit record isn't the worst thing in the world. Things happen. Lenders understand this and are willing to give you another chance. As long as you understand what to expect, you will have no problem finding a car loan after filing for bankruptcy.