Auto loans during and after bankruptcy are handled differently, depending on numerous factors. The chapter of bankruptcy filed, the amount you owe on the car loan, the value of your vehicle, and the length of time you owned your vehicle are all factors that determine how auto loans during and after bankruptcy are handled. There may be other factors that might need to be considered too.
We discuss some of the most common questions about auto loans and bankruptcy in this article.
How Are Auto Loans Handled During a Chapter 7 Bankruptcy Case?
A Chapter 7 bankruptcy case is restricted to individuals who cannot afford to repay their debts, business debtors, and corporations. Consumer debtors must meet the income requirements to receive a bankruptcy discharge (debt forgiveness) in Chapter 7. Chapter 7 bankruptcy does not offer a repayment plan.
Therefore, if you are behind on your car payments when you file Chapter 7, your options for keeping your vehicle are limited:
- Catch up the car payments immediately to keep the car.
- Redeem the vehicle by paying a lump sum payment to the creditor that is equal to the fair market value of the vehicle.
- Enter a reaffirmation agreement with the lender, which restructures the car loan. The danger of entering a reaffirmation agreement is that you “reaffirm” the debt. In other words, the debt is not impacted by the bankruptcy case. If you fall behind on the payments again, the creditor can take the car and seek a deficiency judgment.
A deficiency judgment is an amount you owe on the auto loan after the car is sold. Some states allow creditors to garnish wages for deficiency judgments. If you surrender your vehicle in Chapter 7, the creditor cannot seek a deficiency judgment.
Therefore, if you owe more on your car than it is worth, surrendering the car in Chapter 7 gets rid of the debt without the worry of a deficiency judgment.
How Are Auto Loans Handled During a Chapter 13 Bankruptcy Case?
Filing a Chapter 13 case can help you with your auto loan in several ways:
Surrender Your Car in Chapter 13
If you want to surrender your vehicle in Chapter 13, you can do so. As long as you complete your Chapter 13 plan, the creditor cannot petition the court for a deficiency judgment or any more money.
Stop Repossession by Filing Chapter 13
The loan payments can be spread out over 60 months, even if you have been paying on your car for several years when you file Chapter 13. By spreading out the car loan, the payments are lower each month, which makes it more affordable to keep the car.
Cram Down a Car Loan in Chapter 13
If you meet specific requirements, you can pay less than you owe on your auto loan to release the lien on your car. This process is referred to as a cramdown. In some cases, a cramdown of your auto loan may also reduce the interest rate.
You must owe more on your car than the car is worth to cram down the loan.
For example, if your car is worth $10,000, but you owe $18,000 on the loan, you might be able to pay just $10,000 to own your car free and clear. A bankruptcy lawyer can review your case to determine if you meet the requirements for a cramdown.
Can I Buy a Car During Chapter 13 Bankrupt y?
In some cases, you can obtain an auto loan during Chapter 13 to purchase another vehicle. Since most Chapter 13 cases take a little over five years to complete, the court understands that you might need to purchase another vehicle during that time. Your car could break down, or your spouse may get a job and you need a second car for your family.
You must have permission from the bankruptcy court to borrow money to buy a car during a Chapter 13 case. You must file a petition with the court providing all of the details of the proposed loan. The petition must also include details about the car. The court only grants permission for an auto loan in Chapter 13 if you can prove that you can afford to pay the new loan payments while keeping your Chapter 13 plan payments current.
When Can I Get an Auto Loan After Bankruptcy?
As soon as you receive the order closing your bankruptcy case, you can apply for a car loan. There is not a waiting period before you can qualify for a car loan. However, it can be challenging to qualify for a car loan with a bankruptcy case on your record. Bankruptcy cases remain on your credit report for seven to ten years (Chapter 13 is seven years and Chapter 7 is ten years).
If possible, waiting for a few years before you apply for a new car loan can help you qualify. During that time, you can work to improve your credit score and save money for a down payment. The longer you wait between filing bankruptcy and applying for a car loan, the better chance you have of qualifying for an auto loan.
Are interest rates affected negatively by filing bankruptcy?
Yes, filing bankruptcy can have a negative effect on interest rates for auto loans. You may find a lender who is willing to give you a car loan immediately after you complete a bankruptcy case, but you may pay a higher interest rate.
However, the good news is that time takes care of that problem. Waiting just a year or two to apply for a new car loan could result in a lower interest rate, provided you have been working to improve your credit score during that time.
Buy-Here Pay-Here and No Credit Check Lenders
It can be tempting to use a “buy-here, pay-here” place or an auto dealer that offers “guaranteed” or “no credit check” loans after you complete your bankruptcy case.
While these car dealers do extend credit to individuals who have bankruptcy cases on their credit report, the financing often comes at a very high price. The interest rate and terms of the loan are generally unfavorable. You are likely to pay much more for the car than the car is worth.
Again, if you can wait for at least a year or two to apply for a car loan after bankruptcy, you may qualify for an auto loan at a lower interest rate and better terms. Our blogs entitled “Life After Bankruptcy – Rebuilding Credit And Renting” and “How Long Does Bankruptcy Stay On Your Credit Report” have tips you can use to improve your credit score after bankruptcy.
Get Help Now to File a Bankruptcy Case
If you have debts you cannot pay, a bankruptcy filing might help. We can help you locate a bankruptcy lawyer near you who offers a free bankruptcy consultation. Get started now to see if bankruptcy can help you.
If you have questions about bankruptcy or other debt-relief options, contact Ascend by calling 833-272-3631 for more information.