Finding Car Dealers who Deal with Bankruptcy

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


, - September 26, 2018

While it can be difficult to get approved for car financing with an open bankruptcy, know that there are lenders out there willing to help car buyers going through this. But, before these buyers head to a dealer, it’s important they understand how the type of bankruptcy they’ve filed can affect their car buying experience.

Chapter 7 vs. Chapter 13 Bankruptcy

The two types of personal bankruptcies people can file – Chapter 7 and Chapter 13 – both have the same end goal: to get you free and clear of any debt. Car shoppers dealing with either form of bankruptcy need a dealership that works with bad credit and bankruptcies. But, Chapter 7 and Chapter 13 bankruptcies are vastly different from one another.

A Chapter 7 bankruptcy – also called a liquidation bankruptcy – lasts anywhere from three to six months, remains on credit reports for 10 years, and is the most common type of bankruptcy filing. To repay creditors, a court-appointed trustee is responsible for selling the filer’s nonexempt assets, which, depending on what it’s worth, could include a vehicle. Once the assets are sold, any remaining debt is wiped clean. During this process, the bankruptcy is considered “open,” and getting approved for a car loan during an open Chapter 7 is very difficult. Many lenders are hesitant to finance someone in an open Chapter 7 as the vehicle could be included in the bankruptcy.

A Chapter 13 bankruptcy is a repayment bankruptcy. Instead of a filer’s debt being wiped out in a few months, they come up with a repayment plan with their trustee that lasts either three or five years. Because a Chapter 13 bankruptcy is open for a longer period, courts recognize that it’s possible someone may need a car. The filer needs to obtain a sample financing statement from a dealer and go through the court in order to finance a vehicle. Note that even if they do go through the court, creditors have a chance to oppose this motion and the judge may still deny the request.

Buying a Car during Bankruptcy

Depending on the type of bankruptcy someone files, how they go about getting an auto loan and where they should look differ. The best advice is to wait until the bankruptcy is discharged. But if someone has to wait longer than a few months, or they rely on a car to get them everywhere, they need to do some planning.

With an open Chapter 7 bankruptcy, the likelihood of being able to finance through a traditional lender is slim to none. If the filer can’t wait the few months before the bankruptcy is discharged to get a vehicle, they may be able to get financing through a buy here pay here (BHPH) dealership. These dealers work in-house, and don’t typically run credit checks for approval, making it easier for car buyers dealing with bankruptcy to get financed. Something to keep in mind, though, is that BHPH dealerships usually won’t report on-time payments to the credit bureaus, but they typically report any missed payments. So, if building credit is important, it may be best to wait out the bankruptcy.

With an open Chapter 13 bankruptcy, it’s easier to get approved for an auto loan. But, the filer needs to go through the court to do so, and it isn’t always guaranteed. First, the filer needs to visit a dealer that can work with them and get a sample buying order. On the order, the dealership must list the highest possible interest rate the filer could receive, and the phrase “or similar” next to the vehicle description. Then the purchase order is given to the trustee, reviewed, and, if approved, presented to the court in a motion to incur debt. If the court approves it and there aren’t any objections, then the filer can return to the dealer with an order to incur debt and complete the car buying process.

Looking to Find Financing with an Open Bankruptcy?

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.


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