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Taking on a new car loan while in bankruptcy Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial decisions by providing you with financial calculators and interactive tools as well as publishing quality and impartial content. This allows users to conduct research and analyze information for no cost and help you make sound financial decisions. Bankrate has partnerships with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The products that appear on this site are from companies who pay us. This compensation could affect how and where products appear on this site, including such things as the sequence in which they appear within the listing categories in the event that they are not permitted by law. Our mortgage or home equity products, as well as other home loan products. This compensation, however, does affect the information we provide, or the reviews that appear on this website. We do not include the entire universe of businesses or financial offerings that could be accessible to you. SHARE Westend61/Getty images
5 min read Published June 22, 2022
Written by Jackie Lam Written by Contributing writer Jackie Lam is a contributing writer for Bankrate. Jackie is a writer on auto loans. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to manage their finances by providing clear, well-researched information that break down complicated topics into manageable bites. The Bankrate promise
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We are compensated in exchange for the promotion of sponsored goods and services or when you click on certain links posted on our website. So, this compensation can influence the manner, place and in what order products are displayed within the categories of listing, except where prohibited by law. This is the case for our loan products, such as mortgages and home equity, and other home loan products. Other factors, like our own rules for our website and whether a product is available within the area you reside in or is within your own personal credit score may also influence the manner in which products are featured on this site. Although we try to offer a wide range offers, Bankrate does not include specific information on every financial or credit products or services. If you make an application for Chapter 13 bankruptcy -- often referred to as repayment bankruptcy credit rating will suffer and it will remain on your credit score over seven years. With Chapter 13 bankruptcy, you enter a repayment plan approved by the court, explains Amy Lins, vice president of enterprise learning at , a nonprofit credit counseling agency located within Sugar Land, Texas. "This payment is spread over a period of 3 to five years, and means that you are not able to take on any more debt," says Lins. "However, the court recognizes that life can change, and it may be necessary to acquire vehicles prior to the conclusion that Chapter 13 repayment plan." You may be able to secure a car loan, but the options are restricted. How to get a car loan during Chapter 13 bankruptcy If you have enough cash to pay for a car, you can buy a car for cash without going through the court. You may have to modify your bankruptcy plan in order to get it changed, so consult your attorney before making any decisions. If you need to get a car loan when you're still in your repayment plan, and prior to your discharge from bankruptcy, it is possible to take it. There are four steps you can follow, according to Lins. 1. Create a budget that shows that you are able to pay for the car payment You'll need to demonstrate that you can manage your debt repayment with additional financial commitments and responsibilities , as well as the payment for the car. "If the purchase of a car is going to impact other elements of your repayment plan, work with your attorney to create a new proposed payment plan" Lins says. Lins. 2. Find a lender who can work with Chapter 13 bankruptcies There are only a few car dealers and lenders that will cooperate with people in an active bankruptcy, but there are certainly some that will, says Lins. "Your bankruptcy lawyer may be able provide an inventory of dealers and lenders who are willing to work with you and you should check with your local credit union or bank." Additionally, as your credit score will suffer from bankruptcy, be prepared for higher interest rates, fees and terms that are less favorable. Also, you'll need to find an auto dealer that works with you to get your car financed. Despite your options being slim take your time and check rates and terms with a few different lenders. You should have the offer, including the price of purchase, the monthly payment and interest rate in writing and submitted to the court, explains Lins. "Keep the cost of the purchase as low as possible and wait to exit bankruptcy and rehabilitate your credit before purchasing a vehicle that is more costly," she says. 3. Make a motion to the court to purchase the car to pay off the car's debt while still paying off your debts, you'll need to make a motion to the court to have it approved. This involves bringing in your request and presenting a convincing explanation of why you need to purchase a vehicle and the reason you'll need finance to do so. Perhaps your last car broke down, and the repair costs are so costly that it is more sensible to buy a brand new car. Perhaps you reside in an area in which public transportation isn't readily accessible. This step is something your bankruptcy attorney can assist with. 4. Complete the purchase Once the purchase is approved by the court, you are now able to apply for a car loan and get your car. Purchase the car and start paying the loan off with your other obligations. How to obtain a car loan in the aftermath of Chapter 13 bankruptcy Once you finish your court-ordered debt repayment and you are discharged, you don't need to undergo the court process to get your approved. If you're able to, try to make do with the car you have until you are at least six months past discharge, according to Lins. Enhance your credit score There are several ways to get credit, one of which is using a secured credit card. Obtaining a secured credit card requires putting down a small deposit that serves as collateral. Your deposit becomes the credit line to the credit card you have. "Charging and paying back small amounts over time can aid in building a positive credit history," says Lins. It is also possible to look into services that will report rent and other charges, such as cell phone, utilities and streaming services to help you build or rebuild an punctual payment history, according to Lins. "These services usually charge an affordable fee, however they can be free," she says. "Using your rent and utility bills to establish credit history could be a good strategy to kick-start rebuilding." Keep track of your credit. In addition to rebuilding your credit score, you'll be able to monitor it. This will let you know the progress you're making and what kinds of improvements could be made. Monitoring your credit regularly will allow you to spot any errors that could hurt your score in the future. You can order free reports from AnnualCreditReport.com or sign up for a free credit monitoring service. Many credit cards also offer a free monthly look at the credit scores of your customers. Shop around for a car in your budget Making sure to shop for cars that are within your budget and what you can reasonably afford will ensure you stay on top of the obligations. This will help rebuild your credit score and ensure that you are on the right the right track. Review your monthly expenses to determine how much car loan your budget can allow. In general, car related costs should not exceed 20 percent of your budget per month. This is a threshold that includes the cost of fuel maintenance, insurance and gas. It is also possible to establish a price target to purchase your car using the data available on websites such as Edmunds and Kelley, which list new and used price of cars as well as estimates of insurance costs. Consider a down payment. The more you pay, the less you'll have to pay on it in the near future. Review your budget and figure out the amount you can be able to save every month towards purchasing a vehicle. Ideally you should save as much as possible however it all comes down to your earnings as well as your expenses and obligations. Alternatives to getting the new car loan If you're unhappy with the rates and terms provided for an auto loan, or are having difficulty getting your loan approved at all, consider other options. Looking for a cheaper car. Even if the interest is very high, your total payment and how much you owe monthly will be lower. Wait and finance later when your credit is better. When you have rebuilt your credit score, you'll likely qualify for a greater variety of auto loans with low interest rates, lower charges and better terms. You can pay cash in full. Saving money and paying directly for your car means you won't have to seek a car loan for any reason and will be able to save on interest charges. However, if you're in need of a car sooner than later, you might require a . The bottom line is that getting a car loan during Chapter 13 bankruptcy is possible. Find a lender who is willing to work in conjunction with Chapter 13 bankruptcies and create an affordable budget that will allow you to make debt repayments and also pay for the car loan. It's also crucial to research the market to find a car that fits within your budget. When you've been discharged of bankruptcy, finance options also are available. But the first step is to restore your credit score by creating a track record of consistently making debt payments on time. "It's an old saying, however, time does heal any wound, including those in your score," says Lins. Learn more
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Written by Contributing writer Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances through providing concise, well-studied and well-researched content that breaks down complicated topics into digestible chunks.
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