Buy a Car After Bankruptcy
If you have recently filed bankruptcy and now need to buy a car, you will likely have some difficulties. However, if you are diligent with your bankruptcy case, so that you earn your discharge, you can then work to rebuild your credit. You will then have an easier time getting a loan to buy a car. Even before you rebuild your credit, there are several ways that you can buy a car following a bankruptcy filing. You will need to shop a little more creatively and be willing to make some concessions, but there are possibilities.
Earning Your Bankruptcy Discharge
- Cooperate with the bankruptcy trustee. If you have filed bankruptcy, your first concern is to earn your bankruptcy discharge. A discharge is the court order that releases you of most financial obligations that existed when you filed bankruptcy. In order to receive your bankruptcy discharge, you must cooperate with a court official known as the bankruptcy trustee. In most cases, little will be required. However, you need to remain in contact with the trustee and comply with any directions that are given to you.
- Attend the 341 meeting. Within 60 days after filing your petition, you will receive a notice to attend a meeting with the bankruptcy trustee and whichever creditors choose to attend. This meeting is called the “341 meeting,” because it is ordered by Section 341 of the U.S. Bankruptcy Code. At the meeting, you will need to answer any questions that the trustee may ask about your finances and your bankruptcy filing. You also may be asked questions by any creditors.
- For example, the trustee at the 341 meeting may ask you to explain the history of deposits and withdrawals to your bank account, if anything there appears questionable.
- A bank that issued a loan, for example, might ask you to explain what you did with the money that was loaned. The purpose for such questions would be to determine if you are hiding any assets.
- Wait for your discharge to enter. Unless any unusual circumstances arise, the court will issue your bankruptcy discharge within 60 days after the 341 meeting. The case will not officially close for several more weeks, but the discharge order is the most important for you.
- Update your credit report after the bankruptcy. After your discharge enters, you can then contact the credit reporting companies and ask to remove debts that predated your bankruptcy case. You cannot remove the fact of the bankruptcy filing itself for up to seven or ten years, depending on the type of case you filed. However, you can remove individual debts, which will make your credit report appear somewhat better.
- If your bankruptcy was a Chapter 7 case, then it will remain on your credit history for ten years. If you filed a Chapter 13 bankruptcy case, it will remain on your credit history for seven years. For help with filing either type of bankruptcy case, you might want to read File for Chapter 7 Bankruptcy or File for Chapter 13 Bankruptcy.
Buying a Car With Poor or No Credit
- Be willing to pay more. In some cases, if you are willing to pay a higher price for the car, the dealer may be willing to sell to you with poor credit. The lender will accept a slightly higher risk that you may default on the car loan, in exchange for selling the car for a higher price. With this in mind, you may be able to shop for cars at mainstream dealerships. When you get to the topic of financing, you may wish to raise this possibility.
- Consider new credit offers on auto loans. Some lenders may seek out borrowers newly discharged from bankruptcy, knowing that bankruptcy cannot be taken again for a certain number of years, which means their collateral is more secure and the borrower will have fewer payment obligations than prior to bankruptcy. As a borrower, you must be wary of high fees and interest rates when dealing with such lenders.
- Buy a car that you can afford without a loan. If you need to buy a car following bankruptcy, you may find it difficult to do so without having strong credit to get a car loan. If possible, you can avoid this problem by looking for a car that you can afford without a loan. Search for used cars, possibly with higher mileage, which are offered at lower prices.
- If you a buying a used car, particularly an older one or one with high mileage, it is important that you have a mechanic examine the car for you. Make sure that the car is in good working order and will not cost you more in repairs in the near future.
- Borrow money from friends or family members. If someone in your family can afford to help you, then you may be able to get a personal loan to buy a car, without concern for your credit score. You will still need to write a loan agreement and establish expectations for regular payments. You will then need to commit to making those payments on time. But if someone can do this for you, you may be able to get a car soon.
- Be wary of the impact borrowing money from family and friends can have on these relationships, especially if you are unable to pay them back. You may be better off having the family member buy the car and then lease it to you.
- Get a cosigner. A cosigner who has a good credit history can help you with your own loan application. The lender will be able to rely on that person for repayment, in case you default on the loan. If you have a friend or family member who is able to do this for you, then a lender should be willing to work with you for your car purchase.
- When you get a cosigner, you still become the owner of the car. The cosigner is agreeing to become legally responsible for the loan payments. If you make the payments as they come due, the cosigner will never have any involvement with the car or the loan. If you default, however, the lender will be able to demand full payment from the cosigner.
- Again, you must carefully consider the impact on your relationship with the cosigner in the event that you default.
- Buy from a private seller who can self-finance. You may be able to find a used car listed in the classified or other local advertisements that is being offered privately by its owner. Such sellers often prefer to sell for cash, but you may be able to arrange a financing deal, probably for a slightly higher purchase price. The seller can agree to accept payments from you over time, if you can convince him or her that you will make the payments on time. Private sellers like this are often less concerned with your overall credit score.
- Buy from a small dealer that self-finances. Just as with a private seller, many small car dealers may be willing to sell to you with less than perfect credit. They have an interest in selling in volume, so getting the cars to sell may take priority for them over verifying your credit. There may be some additional conditions about the form of your payments each month, but if you can deal with that, you may be able to get your car.
- For example, the dealer might require you to deliver payments each month to the dealership in person rather than mailing them to a financing company.
- Be very careful when dealing with these types of sellers. Often, they make their money through fees and repossession in the event of a late payment (even the first one!). They may constantly repossess and resell the same car again and again to increase their profits.
- Consider leasing as an alternative. If you are having difficulty getting a loan to buy a car, you might be able to lease one. Sometimes, this requires less money up front, so it may be easier for you to afford. Also, with a lease, you will build up positive credit by making monthly payments on time. The risk is less for both you and the lender because a lease has an end point. If you cannot make the payments, they will simply take the car back.
- Realize that leases usually require a higher credit rating than purchase due to the conditions under the lease, like restricted mileage, required upkeep, insurance, and so on. No lessor wants to repossess a car where the borrower has violated the terms of the lease.
Rebuilding Your Credit
- Create a budget. As part of filing bankruptcy, you were required to participate in one or more credit counseling sessions. Use the information from that counseling to develop a budget for yourself and your family. Figure out how much you earn each month and how much of that income has to go to fixed expenses. The remainder is your disposable income for the month, which you can budget for additional spending. Be sure to stay within this limit, in order to develop good spending habits and improve your credit rating.
- Open a secured credit card account. As soon as possible after receiving your discharge, you should contact your bank, or another lender, to open a secured credit card. For a secured credit card, you need to deposit an amount of money with the bank. You will then have a credit card that looks and operates like a standard credit card, but your credit line will be limited by the amount of money that you have on deposit. Most banks will grant a secured credit account without concern for your bankruptcy history.
- Use your credit card carefully and make monthly payments timely. Be sure that you limit your credit spending to a manageable amount. Remain aware of amounts that you spend, and stay within limits that you can repay each month.
As a general rule of thumb, you should keep your spending to 10-30% of the credit limit.
- Pay your monthly credit card bills in full and on time. You need to rebuild a positive reputation for being able to handle credit. Making payments on time, over a long period of time, will help do this for you.
- Review your credit report immediately after bankruptcy. Get a copy of your full credit report from each of the three main reporting agencies, Experian, TransUnion and Equifax. Review it carefully, and contact the agency to dispute any items that you believe are incorrect or that you believe can be removed following the bankruptcy case. Use this opportunity to get your credit report as accurate as you can.
- Monitor your credit score monthly. As you work to rebuild your credit, making timely payments, you should continue to check your credit score. If you see it move in the wrong direction at any time, you need to find out why. As long as you are doing everything correctly, that should not happen.
- There are several sources available online for free credit score checks. VantageScore is a competing agency to the FICO score that most people are aware of, but it provides similar information. VantageScore is generally free through several sources.