How long after bankruptcy can I get a car loan? You can apply for a car loan immediately after filing. Some dealerships offer exclusive financing to bankruptcy filers and will have a vehicle ready to close the next day after you file.
However, favorable financing terms usually require additional time after filing to rebuild your credit. In Chapter 13 cases, you can apply during your 3- to 5-year plan, but only with the bankruptcy court’s advance approval.
Whether you use Chapter 7 or Chapter 13 bankruptcy can make a difference in some important ways, including your ability to get auto financing while your bankruptcy is in progress.
In this article, we cover how Chapter 7 and Chapter 13 bankruptcy affect your ability to get a car loan.
To learn more or get legal advice on this or any other bankruptcy issue, including filing for bankruptcy or alternative forms of debt relief in Arizona, call the bankruptcy attorneys at Stone Rose Law at (480) 739-2448, or reach us online.
How to Get a Car Loan After Chapter 7 Bankruptcy
You may legally incur new debt after filing Chapter 7, but any new debt is not discharged under 11 U.S.C. § 727(b), so courts strongly discourage it. Because of this, as a general rule, it is unlikely that any lender will work with you until your discharge is finalized, about four to six months after you file your petition.
Even after your discharge, because of the short-term negative effects on your credit, most traditional banks and prime lenders may be unwilling to approve a loan for you until at least a year has passed and your credit has begun to recover.
This does not mean you can’t get a car loan; it means you may need to work with a lender that specializes in borrowers with damaged credit.
Examples of these kinds of creditors include:
- Subprime auto lenders
- Auto dealership special financing programs
- Credit unions that offer “second chance” loans
You should expect to pay a significant amount in fees and high interest when you work with one of these lenders. It is not unusual for a specialized lender’s annual percentage rate (APR) to be in the range of 15% to 20% if you are fresh out of a Chapter 7. Your lender may also require a substantial down payment.
Your best negotiating leverage with specialized lenders comes from time and taking steps to rebuild your credit. As long as you maintain a steady income and take steps to restore your credit, such as obtaining a secured credit card and paying it on time each month, your credit score should gradually improve.
The longer you work on building up your credit, the more likely it becomes that you can get a car loan with lower payments and interest. After two years or more, you can qualify for more competitive loan terms.
The timeline chart below shows how this trend works.
How to Get a Car Loan After Bankruptcy in Chapter 13
An important distinction between Chapter 13 bankruptcy and Chapter 7 is that it will take you considerably longer to discharge your debts. Instead of four to six months, your Chapter 13 debt repayment plan will take three to five years to complete.
Suppose you wait until after your payment plan is complete to look for a new car loan; the same basic considerations for Chapter 7 above will apply. A Chapter 13 remains on your credit report for 7 years instead of 10, which may result in a shorter negative reporting period, though credit scoring models do not guarantee a smaller impact.
Also, by completing your payment plan, you can show that you can be trusted to stick to a monthly payment regimen, so you can persuade a lender to work with you under better payment and interest terms than you would after a Chapter 7.
If you do not want to wait until the bankruptcy court discharges your Chapter 13, then, unlike a Chapter 7, it may be possible to look for a car loan while your repayment plan is still ongoing.
If you do choose to get a car loan during your Chapter 13 case, you will need advance approval. Before your plan is confirmed, you must file an ex parte motion with the bankruptcy court — with the trustee’s consent.
After your plan is confirmed, Arizona’s local bankruptcy rule 2084-25(c) gives you an easier path: the trustee’s written consent alone can substitute for a court order, as long as you provide the same information you would have included in a motion.
Under Arizona’s local bankruptcy rule 2084-25(a), you must meet the following criteria to obtain permission:
- You are current on your Chapter 13 payments and have provided current income verification.
- Your most recent Schedules I and J show that you can pay the new loan, along with your plan payments and reasonable living expenses.
- The amount of the new debt is reasonable.
- The vehicle is necessary for your support or employment, and it is the only collateral for the loan.
The lender cannot close on your loan without Trustee approval or court approval. It is important to discuss your need to finance a vehicle with your bankruptcy Attorney before you attempt to purchase.
What Interest Rates Should You Expect After Bankruptcy?
Your interest rate depends on three things: which bankruptcy chapter you used, how long ago it was discharged, and how much you have done to rebuild credit. If you apply within 6 months of a Chapter 7 filing, expect a subprime APR in the range of 15% to 20%.
After 12 months of consistent on-time payments and an improved credit score, you may qualify for rates closer to 10% to 15%. Two years out, with a clean credit report and a meaningful down payment, you may even qualify for prime or near-prime rates.
Loan term matters too. A shorter loan term usually carries a lower interest rate but a higher monthly payment. In contrast, a longer loan term lowers the monthly payment but pushes up the total interest you pay over the life of the loan. After bankruptcy, lenders also tend to cap loan terms at four or five years for higher-mileage or older vehicles.
Can You Refinance Your Car Loan After Bankruptcy?
Yes, and refinancing is one of the most effective ways to bring your interest rate down after your initial post-bankruptcy car loan. Unlike an unsecured loan, a car loan stays workable for lenders because the vehicle itself secures the debt, which is also why refinancing is on the table once your credit recovers.
After 6 months to a year of on-time payments and an improved credit score, you may qualify to refinance the loan at a substantially better rate.
Many credit unions and online lenders accept refinance applications from post-bankruptcy borrowers who have already been approved once and built a strong recent payment history, and a successful refinance can drop your monthly payment by enough to make a real difference.
How Can I Get a Car Loan After Bankruptcy?
No matter which form of bankruptcy you use, here are some practical steps you can take to improve your chances of getting a lender to approve a car loan for you.
Have a Stable Income and Maintain a Budget
By showing a prospective lender that you can maintain steady employment and have a consistent income, you can give the lender more confidence in your ability to repay the loan.
By keeping an accurate and realistic budget, you can know in advance how much you may be able to pay monthly, and improve your chances of not getting into a loan arrangement that you cannot afford.
Make the Biggest Down Payment You Can Afford
If you can save up enough money to pay 10% to 20% of the vehicle price up front, this will substantially improve your chances of getting loan approval. Lenders see a larger down payment as an indicator of less risk.
Chances are good that after a bankruptcy, you will need to pay at least 10% down in any event, but the more you can afford, the better. And the less you owe as a loan balance, the better your chances of getting a loan for less interest and a lower payment.
Take Steps to Rebuild Your Credit
If you can, engage in some credit-building activities before you approach a car lender. Stone Rose Law offers a credit recovery program to all clients after filing. Any activity in which you can pay back even a small loan amount over six months to a year can increase your credit score, and this can translate into more lender confidence in you.
Shop Carefully for the Right Lender
Consider multiple lenders before choosing one. At Stone Rose Law, we provide a list of recommended dealers who offer exclusive financing for individuals after bankruptcy.
If you don’t have access to a referral list, starting with credit unions is a good choice because they often offer members lower rates and more flexible terms when rebuilding credit after a bankruptcy.
Other options can include specialized subprime auto finance companies that service post-bankruptcy customers, and dealer-arranged financing. However, you may want to be cautious with dealerships that advertise as “buy here, pay here” because they can charge very high interest rates of 20% APR or more and have strict repossession policies.
Consider a Co-Signer
If you have a family member or a trusted friend with good credit who is willing to co-sign your car loan, this can make the difference between loan acceptance and rejection with some lenders and affect your loan terms.
Just remember that your co-signer will be equally responsible for seeing that your car loan gets repaid, so both of you should be clear about this possibility beforehand.
The table below summarizes the key points we have discussed above between Chapter 7 and Chapter 13 bankruptcy when you are looking for a car loan in Arizona.
Do You Have Questions About Car Loan Financing After Bankruptcy?
There is no getting around the fact that if you file for bankruptcy, one of the side effects is going to be short-term damage to your credit rating. A consequence of this is going to be to make it harder for you to find a lender who will be willing to sell you a car on credit without making you pay more in monthly payments, your interest rate, or both.
With the passage of enough time, the negative impact of a recent bankruptcy on your credit will dissipate. If you take steps to rebuild your credit, you can shorten this time span. But you may not be able to hold off on buying a new car before then, and if you do not have enough cash to buy a car outright, you will need to find the best lender and terms you can.
Bankruptcy is a fresh start, and a car loan is one of the first major financial commitments most people take on after it begins. The wrong loan can undo a lot of the progress that filing for bankruptcy was supposed to deliver.
An experienced bankruptcy attorney can help you understand the effects of Chapter 7 or Chapter 13 on your ability to obtain credit, including a car loan, and how to position yourself for the best possible terms.
A Stone Rose Law bankruptcy lawyer can also help you decide which chapter is right for your goals — including buying a car. If you are in an active Chapter 13 case, your lawyer can prepare the motion needed to get court approval for the loan.
Before you file for bankruptcy with a car loan in your sights, talk to a bankruptcy lawyer about timing and strategy — including whether to file Chapter 7 or Chapter 13. A short conversation now can save you thousands in interest later.
To learn more about bankruptcy and car loan financing, call our law firm at (480) 739-2448 or use our online contact form to schedule a free consultation with a Stone Rose Law Arizona bankruptcy attorney.
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