After filing for bankruptcy getting approved for a car loan can seem all but impossible. The black mark on your credit announces to lenders that you are a potential risk, and if you feel like no one will want to approve your request for credit you are not alone. Walking into a bank or credit union after going through bankruptcy can seem intimidating, and often loan officers don’t try to make the process any easier. According to Edward Boltz, president of the National Association of Consumer Bankruptcy Attorneys, financial institutions lend to people dealing with bankruptcy issues on a regular basis. To help making the lending process a little easier, and less scary we have put together this comprehensive guide. In it you will find all of the information you need to get a car loan after you’ve filed for bankruptcy.

Even after filing for bankruptcy it is still possible for you to get a car loan from a reputable financial institution. In some cases it might make more sense financially for you to get the loan directly from the dealership, but even then your credit history will affect the terms and rates. While you may feel like there is no chance of you ever being approved for a car loan, it is important to remember that it is not hopeless as long as you take the right steps. In this guide we have included all of the information you need to find a lender and be approved for a car loan so you can start rebuilding your credit after bankruptcy.

Loans have a long history and mentions of lenders and borrowers can be found in the earliest known writings. The ancient Sumerians had an established banking system in place that loaned citizens’ money for land, livestock and foodstuff, and this tradition has continued into the present day. While the terminology included in the loan agreements has changed dramatically, the general principle is still the same. The lender loans a set amount of money to the borrower at an interest rate that both parties agree to. Penalties are set into place to prevent the borrower from not repaying the loan, and it is also understood that the lender can take possession of certain items if the money is not repaid by a set date and time.

The fact that the general idea behind loans has barely changed in thousands of years is a testament to its ability to help improve peoples’ lives. While loans for cars have only been around since the early 1900’s, the general premise is the same. Monies are loaned to purchase a vehicle, and repaid by the agreed upon time.

Reference:

• A brief history of loans

By 1920 the Federal Reserve had publically warned banks to stop offering loans to consumers who wanted to purchase an automobile for leisure. This statement alone shows how determined Americans were to own a car. The Federal Reserve was prompted to issue that warning over 90 years ago in an effort to protect the economy, and consumers’ finances. With banks lending money to just about anyone, government officials feared the system would collapse. While the stock market crash nine years later effectively set the entire country into a state of bankruptcy, financial institutions are still ready to approve auto loans to people who have filed for chapter 7 or 13.

The Wilbur Tribune, in response to the Fed’s warning about issuing car loans, printed an article stating that the Declaration of Independence guaranteed everyone’s right to own an automobile as covered under their right to pursue happiness. With financial institutions still feeling the same today, it gives hope to people who have declared bankruptcy that they can get approved for a car loan.

Reference:

• Automotive Financing and the Pursuit of Happiness

After experiencing the stress and even shame of going through bankruptcy it can be hard to see how there can be any benefits associated with taking out a loan, even if it is for a much needed car. What might be surprising to some consumers is that there is hope after bankruptcy. Deciding to finance a car, even with the black mark on your credit record, can have some surprising benefits. It is important to remember that interest rates can and will vary so you will want to shop around in order to find the best car loan.

While it is not uncommon to find that you have some extra money after filing for bankruptcy, this does not mean that you want to immediately use it to purchase a vehicle. Not only will you not get the benefits associated with a car loan, but it might be illegal for use to use the money for anything other than paying off your creditors. It is always best to check with a bankruptcy attorney before spending any extra money that might be left after settling in bankruptcy court.

Any major purchase has an almost immediate effect on your credit, and it is hard to find one larger than a vehicle. The monthly payments will help show that you are financially responsible, and each one that is made on time will help your credit score rise. It takes time, sometimes up to 10 years for a bankruptcy judgment to be erased from your credit report and a car loan will give you the opportunity you need to start building a strong history.

Reference:

• Can I Buy a Car After Bankruptcy?

There is a major difference between Chapter 7 and Chapter 13 bankruptcy filings, and it will affect the car loan.

The main reason Chapter 7 bankruptcy filings are more common is that the entire process generally only takes a few months. Creditors are taken care of, and this usually compensates for the fact that your assets are generally seized in an effort by the courts to pay off lenders. Even though past debts are erased in a few months, the bankruptcy judgment can stay on your credit report up to 10 years.

While Chapter 13 bankruptcy filings are less common, some consumers prefer to go this route do to the possibility that they might get to keep some of their assets.

You also have to pay all or part of the debt back, and the record of the bankruptcy judgment can stay on your credit record for up to seven years. While the court case is being settled it is not uncommon for all assets to be frozen, which can include a vehicle if it is listed in the proceedings.

The good news is that financial institutions expect this, and most reputable lenders are set up to handle loan requests made during bankruptcy hearings. According to Henry Hildebrand III, a bankruptcy trustee working in Nashville, Tennessee, “it’s really not hard to get new debt, particularly if you need it”. This is welcome news for consumers whose assets are frozen due to pending bankruptcy litigation. When it comes to choosing between Chapter 7 and Chapter 13 the decision needs to be made one an individual basis, but it is nice to know that financial institutions are still willing to work with you if your assets are frozen or after the bankruptcy agreement appears on your credit report.

Reference:

• How To Buy a Car After Bankruptcy

In general the basics of a bankruptcy car loan are not any different than other types of credit. You will still need to sign on the dotted line and have all of your paperwork in order. You also want to carefully check all of your available options, and this does mean comparing interest rates. One of the unfortunate downsides of bankruptcy protection is the damage it does to your credit, and this will translate into higher interest rates. With a little research and by asking the right questions it is possible to find a bankruptcy car loan with interest rates that are reasonable. Over time you can also choose to refinance which should result in lower interest rates.

If you are wondering why interest rates are so important it affects how long it will take for the loan to be repaid. If the car loan comes with a high interest rate the majority of the money you pay each month won’t go to repaying the actual debt. Financial institutions will make plenty of money off of the interest, but it will take you longer to pay off the debt. You can shorter the amount of time you have to repay the car loan, but after going through bankruptcy proceedings you might not be capable of keeping up with higher monthly payments.

Reference:

• Getting your first post-bankruptcy car loan

Just like with any other loan you will need to have copies of your credit reports and scores. It can be a little painful to see your scores after declaring bankruptcy, but taking out a car loan is the first step in improving your credit history. Not only will you need these reports as part of the paperwork necessary to complete the bankruptcy car loan process, it is always a good idea to know exactly what potential lenders will see when they look at your credit history. Unfortunately mistakes on credit reports are common, especially after going through the sometimes complicated bankruptcy process.

There are three agencies that keep track of consumers’ credit scores, Equifax, Experian and TransUnion. While these agencies use slightly different methods, all will have your current FICO score. While your FICO score after bankruptcy will be well below the subprime rate, and lenders do expect this, they still want to see exactly what it is.

Chances are your credit report will have a record of a previous auto loan, and of the payments that were made on it. For obvious reasons, this will be extremely important for future car loans.

Eugenie Melchionne, a bankruptcy attorney in Connecticut has some helpful advice for anyone looking to secure a car loan after filing for Chapter 7 or 13.

He states that there are a few important questions to think about before applying for a bankruptcy car loan. If you were already making payments on a car before being awarded bankruptcy protection was an agreement made to repay the loan balance. If so, it should be on your credit report. This will show potential lenders that you are not a high risk applicant. If the loan was not repaid and you still have possession of the vehicle any payments that might have been made will probably not be on your credit report. This could have a negative effect on lenders, and lessen your chances of being approved.

If this is an issue for you, Mr. Melchionne recommends getting proof of any payments you may have made from the original lender. It might be embarrassing to have to face someone that was not fully repaid, but it is a necessary step if you want to be approved for a car loan with reasonable interest rates and start to rebuild your credit history.

Reference:

• How to get a car loan after bankruptcy

When it comes to down payments and car loans it is almost always recommended, but it is a little different when bankruptcy judgments are involved. The first thing you need to consider are the legal issues and whenever you are in doubt always check for a reputable practicing attorney. The financial institution can also help answer any questions you might have regarding any assets that are left after going through bankruptcy proceedings.

In many cases there is extra money after a bankruptcy case has been settled. Since the debt has been erased you no longer have to make payments to past lenders. While we can’t stress enough the importance of checking with an expert first, in most cases this extra money can be put towards a down payment on another vehicle. The advantage of a large down payment is that financial institutions are taking less of a risk if they approve you for the car loan.

If you were allowed to keep your vehicle and the courts have declared that it is legally yours to do with as you wish, it can be used as a down payment. While only the dealership will accept the actual vehicle, you can put it up for sale yourself. It might take a little longer for you to sell the vehicle yourself, but there are also some benefits that shouldn’t be ignored. One of the main advantages is that in most instances you can actually make more off of your old car if you take the time to sell it yourself. The other advantage is that most financial experts recommend that you wait 6 months to one year before opening a new line of credit after declaring bankruptcy. Not only does this give you time to start recovering from the stress of the court proceedings, which can lead you to make rash financial decisions, it also gives your credit report time to accurately reflect your current history.

Reference:

• How to get a car loan after bankruptcy

Even though this might seem impossible you still need to start reestablishing your credit if you want to be approved for a car loan after declaring bankruptcy. This might also seem like a bad decision financially, but at some point you will need to make a major purchase and it will make a significant difference in your chances of being approved if you have some credit already reestablished.

While financial experts do recommend waiting 6 months to a year before making any purchase on credit, when you are ready it is a good idea to apply for a secured card. The limit will probably be small, but this is not a problem since the goal is to improve your credit and not go back into debt.

Not only will you already have an established relationship with the bank or credit union, but there will also be a record of your timely monthly payments. This is often enough for you to qualify for slightly lower interest rates.

Reference:

• Buying a Car after Bankruptcy

One of the first things that you will notice when you are searching for a bankruptcy car loan is that the interest rates will vary significantly. This is important since the amount of interest that is tacked onto the loan will determine how much your monthly payments are, along with the length of time you have to pay it back.

If you are already a member of a work or neighborhood credit union this might be your best option. Members are often eligible for certain perks and discounts that others are not privy to. This can result in lower monthly payments and interest rates, which make the car loan significantly easier to pay back.

FDIC insured banks are another good option, and the same benefits can apply if you go through a financial institution that you have already established a history with. This includes any open accounts or lines of credit that you might already have. All bankruptcy experts agree that you do want to avoid taking a loan out from a “buy here pay here” lot where your vehicle choices are often limited and interest rates typically exceed the Kelley Blue Book value of the automobile.

Since you are a subprime borrower some financial institutions can hide extra costs and fees in the loan, which can cause the initially agreed upon payments to be much higher than you planned. The added costs could make it difficult to make the payments on time, and bankruptcy is often not an option after you have already filed for it once.

Reference:

• How to get a car loan after bankruptcy

Unfortunately once you have declared bankruptcy you can often find yourself the target of scams, and this is particularly true when you are shopping for car loans. The National Independent Automobile Dealers Association (NIADA) recommends that you take extreme care before signing any agreement for a car loan. While the NIADA does include some “Buy Here Pay Here” dealerships among its members, it even recommends that you go through a FDIC insured financial institution for any type of car loan you might need after bankruptcy.

Checking with the Better Business Bureau and other consumer advocacy groups can provide you with the information you need concerning specific lenders, and prevent you from making a mistake that could have devastating effects on your financial future. If the potential lender is more than willing to approve you for a new luxury car loan, experts state that this is probably too good to be true and is simply a scam. If you are willing to take the time to do the research, you can be approved for a car loan with reasonable interest rates even after you have filed for bankruptcy.

Reference:

• How To Buy a Car After Bankruptcy