Dear Bankruptcy Adviser,
My wife and I filed chapter 7 in 2005. We kept our home. We have a first and second mortgage on it. Our car, a 2001 Ford Taurus, has 152,000 miles on it and is starting to have a few problems. My question is: Where we can buy another car, possibly a new one, since we have filed chapter 7?
First of all, congratulations. You and your wife filed, received a discharge and kept your home. That's an excellent outcome -- great work!
Now, as to your question of buying a car, this is a landmark challenge that happens to everyone who files bankruptcy: the first major purchase that requires financing. How do you accomplish this when bankruptcy has destroyed your credit?
By paying attention to these four important steps, you will be able to rebuild your credit history and lower the cost of important purchases.
4 keys to post-bankruptcy borrowing
- Clarifying your priorities
- Identifying the right kind of deal
- Re-establishing your credit
- Being diligent in your search
1. Clarifying your priorities: While it can be tempting to try to buy a new car, in my opinion the priority is: reliable transportation you can comfortably afford. I suspect you're on board with this idea, Tony. Therefore, consider a reliable used car. After all, why buy something that depreciates 20 percent when you drive it off the lot?
2. Identifying the right kind of deal: First, consult a reliable auto rating publication, such as Consumer Reports, and look for vehicles in the $10,000 to $15,000 price range. You're obviously driving your car a lot, and you need something that can handle the mileage. Also, for everyone else reading this column, I wouldn't consider going much cheaper. The reason is that it takes a lot of time and energy and money to go through the dying throes of one car and to purchase another. You can save yourself a lot of expense and hassle if you buy the right $10,000 car and drive it for six years than if you buy two $5,000 cars and drive each for three years.
Just to be explicit, if you buy a $10,000 car and get a standard four-year loan at a rate of 10 percent to 15 percent, that comes to a monthly car payment of $250 to $280. This is the kind of scenario for which you need to be prepared. Bankrate's auto loan calculator can help you figure the exact payment.
3. Re-establishing your credit: Prior to looking for a financing deal on a car, you MUST have a secured or unsecured credit card and some payment history. Banks provide unsecured cards with limits determined by your credit score. If you can get one of these, it will come with an exorbitant interest rate. If you can't get an unsecured card, banks will provide a secured credit card in exchange for a deposit. That is, if you deposit $500 in an account they'll give you a card with a $500 limit -- and an exorbitant interest rate. These might seem like bad deals, but if you don't spend much money and you pay your balances each month, it becomes a very good deal. Why? Because a good payment history makes your credit score climb.
You want to log at least six months of paying your monthly balances on your cards before attempting to make a major purchase that will require financing. Tony, your credit score may have improved slightly because you continue to pay your mortgage, but if you establish a new credit line and keep it, your score will increase even more. This will save you money on your future car loan because you will be eligible for a much better rate.
4. Be diligent in your search: Open the phone book and make a list of every dealer, then contact each one and ask to speak with the finance department. Let them know that you are a homeowner, you pay your mortgages on time and you have your bankruptcy discharge notification, then ask them if they will finance you. If they say yes, ask them what rates are typical for someone in your situation. DO NOT allow them to look at your credit until you get a straight answer. You do not want any credit inquires until you are confident you can obtain a loan.
You must be willing to make 30 to 50 calls (and possibly to visit several dealerships in person) to get the best deal. Do not let the dealer tell you things like "because you filed bankruptcy, this is the best you can get." Absolutely untrue. I know someone who recently bought a used car for $5,000 less than the asking price of $15,000. Yes, he had decent credit, but he also found a situation where the dealer needed to get the car off the lot. These deals exist.
Remember, patience is a virtue, but persistence to the point of success is a blessing.
Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser, go to the "Ask the Experts" page and select "bankruptcy" as the topic.