Buy a Car While in Bankruptcy

The number of bankruptcy filings has grown in recent years, due to the sour economy, high unemployment and rising credit costs. When an individual decides to file for bankruptcy, they may file Chapter 13, which restructures the debt so most of it is paid off over time, or Chapter 7, which eliminates debt by paying back creditors through the liquidation of your non-exempt assets. Obtaining credit for large purchases while in bankruptcy is challenging, but not impossible. Buy a car while in bankruptcy by understanding the rules for Chapter 13 and Chapter 7 and choosing a car you can afford.

Steps

Understanding Your Bankruptcy Situation

1. Confirm what type of bankruptcy you have filed for. Before you attempt to purchase a car, know whether you have filed for Chapter 13 or Chapter 7 bankruptcy. If you file for bankruptcy as an LLC or a business, then your bankruptcy falls under Chapter 11, which carries a different set of rules for asset seizure and debt repayment.
   • If you have filed for Chapter 7 bankruptcy, your debts are typically eliminated completely, and the process usually takes three to four months.
   • Chapter 13 bankruptcy involves repaying your creditors through a Chapter 13 repayment plan that typically lasts three to five years. The repayment plan involves paying a high portion of your monthly income towards debt repayment. Afterwards remaining debts are usually eliminated.
   • For more information, see Know the Difference Between Chapter 7 and Chapter 13 Bankruptcy
2. Know how your bankruptcy impacts your credit. Under both Chapter 7 and Chapter 13 bankruptcy, your credit score will be badly damaged for some time to come. It can take up to 10 years to fully erase the impact of filing for bankruptcy (either Chapter 13 or 7). However, purchasing power through credit can usually be reestablished after 3 years if the initial debt situation was not too drastic.
3. Understand the difference between exempt and non-exempt assets. Every bankruptcy case is different and varies in relation to an individual’s income, the particular amount owed to creditors, and the types of assets an individual holds. Under Chapter 7 bankruptcy, a reasonably priced vehicle that provides you with transportation to necessary destinations, like work or the doctor’s office will usually not be seized to pay off your creditors.
   • However, if you purchased a luxury vehicle, you may be forced to sell that vehicle, purchase a more affordable vehicle, and use the remaining portion for debt repayment. So, before considering the purchase of a new vehicle, see what options are available to you through a debt consultant.
4. Examine whether you truly need a car. Unless you have sufficient cash to purchase a car, getting a car will mean acquiring new debt. While in bankruptcy, acquiring debt means facing potentially high interest rates (as high as 18%) and adding to your debt at a time when you are working to reduce it. Most importantly, you will need to prove to the court as well as your trustee that a car is necessary.
   • If there are alternative options to owning a car (using public transit, walking, carpooling), utilize these first. This could save you significant amount in interest costs, and help you return to financial stability quicker.
5. Wait if you can. Your credit improves as you move further into the bankruptcy process. While it can take 10 years to restore your credit fully, you may be able to negotiate better financing options 1 or 2 years into the bankruptcy process. The longer you wait to purchase a new vehicle, the better payment terms you will get.
6. Be proactive about your finances. Don’t be afraid to consult with a credit or debt specialist to gauge where your credit and financial situation is at throughout the process. While bankruptcy can be demoralizing and difficult to cope with, there are many resources to help you get through the process.
   • Consider local credit counselors or financial planners to start. A simple look through your phone book or online will indicate who is available in your region.

Buying a Car While in Chapter 13 Bankruptcy

1. Demonstrate fiscal competency. Ideally, wait until you are at least 2 years into the Chapter 13 process before considering a car loan. This will give you a better chance of getting approved. Bankruptcy trustees and credit lenders need to know that you fully understand your financial situation and have made the necessary adjustments to your purchasing patterns before they will sign off on a car loan.
   • While this is ideal, if a car is absolutely necessary in order for you to generate income, proceeding with the loan approval process is the wisest course of action.
2. Understand your limitations while in Chapter 13. Bankruptcy law does allow you to take on new debt while in the midst of a Chapter 13 re-payment plan, but it requires your Chapter 13 trustee as well as the court to authorize the new debt..
   • To do this, you will need to demonstrate that taking on the debt is necessary to help you stay on your repayment plan. For example, if you have no other reasonable way to get to work other than driving, you would likely be authorized to borrow money for a car. This is because the loan is necessary for you to continue with your repayment plan.
   • You will also need to confirm that the debt payments are so substantial that they would limit your ability to continue your usual Chapter 13 repayments.
   • Your Chapter 13 debt repayments will drastically cut into the amount you will be able to put into car payments on a month-to-month basis, as you are required to dedicate to portion of your monthly earnings to repaying your existing debt. This will limit the price and quality of car that you can purchase.
3. Choose a car you can afford. During the bankruptcy process, you should have taken a hard look at your income and expenses. You will need to limit yourself to cars that can be paid for within that budget. Be sure to include gas, insurance and maintenance costs in your budget.
   • You will need to look for a used car. Visit your local car dealerships, and read Consumer Reports and Online Dealer Ratings and Reviews. Try to find a car under $15,000 that is in good working condition with relatively low mileage.
   • Always ask for the vehicle's full history report, which will allow you to examine the maintenance record. If you do not know about cars, ask a friend or family member who is knowledgeable to examine it.
   • Try to save as much cash for the purchase as possible. Paying for some (or ideally, all) of the car in cash not only reduces your debt, but it also reduces your interest payments and could also possibly reduce your interest rate since a larger down-payment means less risk for your lender.
   • For more information on calculating driving expenses, see how to calculate the cost of driving.
4. Ask someone close to you to finance the car for you. As an alternative to a traditional car loan, consider asking for a loan from a family member or friend. Alternatively, someone you trust, such as a family member, friend or employer may be willing to put the car loan in their name, and collect monthly payments from you. This will help eliminate extra costs, as low or no interest loans from a friend or family will be easier to manage.
   • However, be advised that this puts your family member or friend in a position where they will be forced to repay your loan in the event that you cannot make your payments. Any late or missed payments may also negatively affect their credit.
5. Shop around for an auto loan. Start with any credit unions, banks, or financial institutions for which you have a previous relationship. Indicate clearly your situation, and ask what options are available. It is important to look at many options and not just settle for the first one you receive, as this gives you greater odds of finding an affordable rate.
   • Note that sometimes, traditional lenders like banks or credit unions may be reluctant to lend to somebody in bankruptcy. In this case, look for lenders who specialize in financing bad credit or bankruptcy car loans.
   • Internet searches, local television or print commercials should help you identify a lender who works with individuals who have bad credit, no credit or have filed for bankruptcy.
   • Avoid "buy-here-pay here" lenders. These are independent used-car dealers where a buyer arranges financing and purchase at the dealership, and these lenders often offer extremely high rates and long loan terms on sometimes unreliable vehicles that sometimes break down during the repayment process..
   • To avoid these types of dealerships, check with the Better Business Bureau to see if many complaints have been made against a dealership beforehand.
6. Gain approval for a loan from your trustee and the court. Your trustee will likely require specific loan terms to analyze. After you have located a potential loan, you can begin the process of approval by contacting your trustee. They will typically give you paperwork to fill out, and you will input details of the loan. They will then use this information to determine if your income can handle the new debt.
   • At this point, your trustee will file a motion with the court to ask for permission, assuming the trustee approves. Your creditors will likely also receive the motion.
   • You may be required to attend a hearing in court.
   • Note that your trustee is very unlikely to approve a car loan over $15,000.
7. Obtain written documentation. When meeting with your bankruptcy trustee, get a written authorization from him or her. This authorization should include the amount that has been approved for a monthly payment..
   • You can then keep this for you own records, and show your car loan lender to finalize the loan.

Buying a Car While in Chapter 7 Bankruptcy

1. Know the parameters of Chapter 7 bankruptcy. Under a Chapter 7 bankruptcy, your non-exempt assets are liquidated to pay back all or a portion of your outstanding debt. Non-exempt assets include musical instruments, expensive clothing or jewelry, expensive furniture or appliances, and any additional vehicles beyond a single car.
   • As much of your debt is paid back to your creditors as a result of the liquidation of your assets, Chapter 7 bankruptcy will not require you to make monthly payments back to your creditors, freeing up your income for necessary purchases. However, this also tends to prevent you from being to pay cash out-of-pocket for a car, as expendable cash would have been seized as non-exempt assets, making obtaining a loan necessary for the purchase of a car.
2. Consider waiting until you have received your bankruptcy discharge. Unlike Chapter 13 bankruptcy which takes many years to finish, Chapter 7 bankruptcies are usually discharged in three to four months.
   • It is very difficult and sometimes impossible to get a loan before a Chapter 7 bankruptcy is discharged. It is wise to wait until the process is complete before attempting.
3. Examine the feasibility of buying a car with cash. This can be a lot more difficult to achieve under Chapter 7 bankruptcy than Chapter 13 bankruptcy. While bankruptcy laws from state-to-state and the terms of individual bankruptcy cases vary, almost all assets held in bank accounts are liquidated to pay back creditors under Chapter 7. However, if you have been able to keep a sizable amount of cash from being seized during your bankruptcy process, it may be possible to purchase a car outright, with cash, while under Chapter 7.
   • It is important to note that at least one car, especially if that vehicle is used to get to and from work, will fall under a "motor vehicle exemption" under the majority of state bankruptcy laws- allowing you to keep a car you already own. With this being the case, it may be wise to purchase the vehicle with cash prior to filing for Chapter 7 bankruptcy.
4. Discuss your plans with your trustee. If you absolutely need to make a purchase during your bankruptcy period, inform your trustee of your plans. The trustee will likely need to approve any potential purchase, so it is important to work with them rather than behind their back.
5. Obtain the necessary paperwork. You will likely not be able to purchase a car under Chapter 7 bankruptcy until you have acquired a bankruptcy discharge notification. This ensures future creditors that, despite your past financial troubles, you have done everything required of you to pay back your outstanding debts as they are outlined your bankruptcy proceedings.
   • If you have not obtained discharge yet, you will likely need paperwork from your trustee approving you to receive a loan.
6. Prepare to make a large down payment. Financing will be available while you are in Chapter 7, but it will be expensive. Most dealers will require at least $1,000 as a down payment, but usually require more.
7. Find a lender. There are many car dealers specializing in making loans to people with bad credit, no credit and even those who have declared bankruptcy. Look online or in local advertisements to find a car dealer who specializes in finding financing for people with credit troubles.
   • Always shop around for as many options as possible. Clearly explain your bankruptcy situation to a lender, being open and clear about your financial difficulties and the reason for them can make them more likely to approve a loan.
   • Visiting institutions (like a bank or credit union) with which you have prior relationships is an important place to start. These institutions have previous records of your payment history, and if you generally have good credit behavior or they see that your bankruptcy was due to a factor beyond your control (like job loss or medical emergency), they may be willing to lend.
   • You can also get a loan with the help of a family member or friend, either as a cosigner or as a personal loan. However, be advised that this makes that person legally responsible for your debt should you fail to make payments.
8. Choose an affordable car. Having filed for bankruptcy, lenders will view you as someone who has proven the capacity to live well beyond his or her means. Because of this, it is critical to select a reasonable car that you can afford before approaching a lender for financing.
   • If possible, it may be wise to approach a friend, family member or trusted acquaintance who would be willing to sign for a car loan on your behalf and arrange a payment schedule with that individual. This will help to reduce the stress of putting forward a high down payment or paying higher interest rates on monthly car payments.
9. Expect a higher interest rate. Your car loan will likely have an interest rate that is higher than traditional loans. This will drastically increase the monthly payments you will owe to the dealership or independent lender.
   • Interest rates may be as high as 15-20%.

Tips

• Remember to make your payments on time. This will help you establish better credit as you recover from your bankruptcy.

Warnings

• Be sure to understand the terms of any car financing you are offered. There are predatory lenders who may use your bankruptcy to sell you a bad car for an extremely high price. Predatory lenders will often charge unfairly high interest rates, or require collateral before you buy your car. They may require credit insurance or charge additional fees without telling you.

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Sources and Citations

See also

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• File for Chapter 7 Bankruptcy
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• Get Cash for Junk Cars
• Decide Whether to Lease or Buy a Car

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