Buying a car in Chapter 13 bankruptcy: How to do it

When you file Chapter 13 bankruptcy — also known as repayment bankruptcy — your credit will take a hit, and it will stay on your credit profile for seven years. With Chapter 13 bankruptcy, you enter a repayment plan approved by the court, explains Amy Lins. She’s the vice president of enterprise learning at Money Management International, a nonprofit credit counseling agency based in Sugar Land, Texas.

“This repayment takes place over a period of three to five years, which includes not taking on new debt,” says Lins. “However, the court recognizes that life happens, and it may be necessary to purchase a vehicle before the completion of the Chapter 13 repayment plan.” You might be able to get a car loan, but your options will be limited.

How to get a car loan while in Chapter 13 bankruptcy

If you have the cash to pay for a car, you can simply purchase a vehicle without going through the court. However, you may need to amend your bankruptcy schedule, so talk to your attorney first.

If you need to get a car loan while you are still on your repayment plan and before you’re discharged from bankruptcy, you can probably do so. Here are four steps to take, explains Lins.

1. Make a new budget showing that you can afford the car payment

You’ll need to show that you can handle a car payment on top of your debt repayment and other financial obligations or responsibilities. “If the car purchase is going to impact other aspects of your repayment plan, work with your attorney to create a new proposed repayment plan,” says Lins.

2. Find a lender that will work with Chapter 13 bankruptcies

Few lenders and car dealers will work with those in active bankruptcy, but they do exist, explains Lins. “Your bankruptcy attorney may be able to provide a list of lenders and dealers that will work with you, and you should check with your local credit union or bank.” And because your credit score will take a hit from bankruptcy, expect higher interest rates, fees and less favorable terms.

You will also need to find a dealer who works with subprime lenders to get the car financed. Despite slim options, do your due diligence and compare rates and terms from a few lenders.

You must have the offer, including the purchase price, monthly payment and interest rate, in writing to provide to the court, explains Lins.

“Keep the purchase price as low as possible and wait to exit bankruptcy and rehabilitate your credit before purchasing a more expensive vehicle,” she advises.

3. File a motion with the court to purchase the car

To take on the car debt while you’re still repaying creditors involved in the bankruptcy, you must file a motion with the court to get it approved. This entails bringing your order and having a solid explanation of why you need to purchase a car and why you’ll need to get financing to do so.

Perhaps your last car broke down and the repairs are so significant that financially it makes more sense to buy a new car. Or you live in an area where public transit isn’t easily accessible. This step is something your bankruptcy lawyer can help with.

4. Complete the purchase

Once the motion has been approved by the court, you can then obtain your car loan and get your car. Make the purchase and begin paying the loan off with your other obligations.

How to get a car loan after Chapter 13 bankruptcy

Once you complete your court-ordered debt repayment and get discharged, you won’t have to go through the courts to get your car purchase approved. If you can, try to make do with the car you have until you are at least six months past discharge, says Lins.

Improve your credit score

There are several ways to improve your credit score, including getting and responsibly using a secured credit card.

Obtaining a secured credit card requires putting down a small deposit that acts as collateral. Your deposit becomes the credit line for your credit card. “Charging and repaying small amounts over time will help rebuild a positive credit history,” says Lins.

You can also look at services that will report rent and other bills, such as cell phone, utilities and streaming services to help you build or rebuild an on-time payment history, says Lins. “These services usually charge a modest fee, but some are free,” she says. “Using your utility bills and rental payments to create credit history can be a good strategy to jump-start the rebuilding process.”

Monitor your credit

Besides rebuilding your credit, you will want to keep tabs on it. This will help you see the progress you are making and what kinds of improvements can be made. Also, monitoring your credit regularly can help you spot errors that can ding your score down the line.

There are a few ways to get your credit score for free. You can order free reports from AnnualCreditReport.com or sign up for a free credit monitoring service. American Express, Bank of America, Discover and Wells Fargo — among others —  also offer a free monthly look at your credit score with their credit cards.

Shop around for a car in your budget

Making sure to shop for a car that’s within the realm of what you can reasonably afford will ensure you stay on top of the payments. This, in turn, can help rebuild your credit and keep you on track.

Review your monthly expenses to determine how much of a car payment your budget will allow. As a rule of thumb, car-related expenses should not exceed 20 percent of your total monthly budget — including the cost of gas, maintenance and insurance.

You may also want to set a target price for your purchase using information available online through websites like Edmunds and Kelley Blue Book, which list new and used car prices as well as insurance cost estimates.

Make a down payment

The larger your down payment, the less you’ll owe on it in the future. Lenders may also be more willing to approve you since you will need to borrow less overall.

Look at your budget and see how much you can reasonably afford to stash away each month toward the purchase of a car. Ideally, you should save as much as possible, but it ultimately boils down to your income, expenses and existing obligations.

Alternatives to taking out a new car loan

If you are unhappy with the rates and terms offered for a bad credit car loan or are having trouble getting approved altogether, consider other options.

• Shopping for a lower-priced vehicle. Even if the interest is high, your overall payment and how much you owe monthly will be more affordable.
• Wait and finance later when your credit has improved. Once you rebuild your credit, you’ll most likely qualify for a wider swath of car loans with lower interest rates, fees and more favorable terms.
• Pay entirely in cash. Saving up and paying cash outright for a car means you won’t have to apply for a car loan at all, which will save you in interest fees.

The bottom line

Getting a car loan during Chapter 13 bankruptcy is possible. Find a lender that is willing to work with Chapter 13 bankruptcies and create a reasonable budget that allows you to continue debt repayments while also paying for a car loan. It’s also important to shop around to find a car that fits within your budget.

After you are discharged from bankruptcy, you won’t need court permission to finance a car. But the first step is to rebuild your credit by setting up a track record of consistently making debt payments on time. “It’s an old saying, but time really does heal all wounds, even wounds to your credit score,” says Lins.