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, 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 the car, say through a car insurance settlement due to a wreck or other loss, you should be able to simply purchase a vehicle for cash without going through the court, says Lins. “In this case, you may need to amend your bankruptcy schedule, so definitely talk to your attorney first before making any purchase,” she says.
If you need to get a car loan while you’re 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 juggle your debt repayment, other financial obligations and responsibilities and the car payment. “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
There are few lenders and car dealers who will work with those in an active bankruptcy, but there certainly are some who will, 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’ll also need to find a dealer who works with subprime lenders to get the car financed. Despite your options being slim, do your due diligence and compare rates and terms from a few different 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 says.
3. File a motion with the court to purchase the car
To take on the car debt while you’re still repaying your debt, you’ll need to 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’ve completed your court-ordered debt repayment and have been discharged, you won’t have to go through the courts to get your car purchase approved. And, if you’re able to, try to make do with the car you have until you’re at least six months past discharge, explains Lins.
Improve your credit score
To start improving your credit score, Lins suggest getting and responsibly using a secured credit card through a local bank or credit union. You put down a small deposit that acts as collateral. Whatever your deposit is also becomes your credit line. “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’ll want to keep tabs on it. This will help you see the progress you’re 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. You can order free reports from AnnualCreditReport.com or sign up for a free credit monitoring service. Many credit cards also offer a free credit score.
Shop around for a car in your budget
Making sure you shop for a car that’s within the realm of what you can reasonably afford will ensure you stay on top of your payments. In turn, it can help rebuild your credit and keep you on track.
Make a down payment
The larger your down payment, the less you’ll owe on it in the future. 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’re unhappy with the rates and terms offered for a car loan, or are having trouble getting approved altogether, consider 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.
Another option, if you can manage, is to 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.
You can also pay in cash entirely. 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. But if you need a car sooner than later and don’t have a lot of funds tucked away for such a large purchase, you might need to take out a loan.
The bottom line
While it might not be the easiest process, getting a car loan during Chapter 13 bankruptcy is possible. After you complete your repayment plan and are discharged from bankruptcy, financing options also exist. Do your homework and research auto loan rates well ahead of time. And whichever route you take, it’s important to rebuild your credit. “It’s an old saying, but time really does heal all wounds, even wounds to your credit score,” says Lins. “Keep your eye on the long-term picture.”