At some point in life, everybody needs a little good grace and a helping hand, financially speaking. Even responsible, well-intentioned individuals can go into bankruptcy if a business plan or investment doesn’t go well. Bankruptcy can be emotionally painful and stressful for a number of reasons, and one of those is that it makes it very difficult to be approved for new loans. Your credit score takes a major hit when you declare bankruptcy. For some people, their score can drop by as many as 200 points and remain that low for seven to ten years. It stings. It hurts even more if you need a new vehicle and you need a loan to get one.
Traditional lending institutions and car dealerships won’t work with people in bankruptcy. You will need to find those who specialize in working with drivers with subprime credit. Luckily, there are car dealers that deal with bankruptcies. Before working with one, it’s important to know what it will take to be considered for a car loan during bankruptcy, what you can realistically expect, and how to find these dealers.
Chapter 7 vs Chapter 13 Bankruptcy
Before we dive in, let’s quickly break down the two most common types of bankruptcy that individuals face: Chapter 7 and Chapter 13. With one, you likely will not be approved for a car loan, but with the other, you have options.
Chapter 7 bankruptcy typically only lasts four to six months, and during it, your assets might be up for liquidation to pay off your debt––including your vehicle. If you are in Chapter 7 bankruptcy, it is highly unlikely a lender or car dealership will give you a car loan since they don’t want to risk that vehicle being up for liquidation. Luckily, because this type of bankruptcy doesn’t last long, it’s not as frustrating to simply wait for it to end before you seek a car loan.
Chapter 13 bankruptcy can last for up to five years. During such a bankruptcy, a person can remain in possession of their assets and even, under some circumstances, take on new loans. If you are in this type of bankruptcy, you might be able to get a car loan if you find a dealer that works with bad credit.
What Is a Dealer Who Works With Bankruptcy?
A car dealership that works with bankruptcies is simply one that specializes in working with buyers with subprime credit. They have relationships with lenders who offer this service, or they even have an in-house lending department that works with subprime borrowers.
These dealerships and lenders also know that there will be additional hoops to jump through before they get you signed on a car loan and send you on your way in your new car. They know the process will be a bit slower.
These dealerships will typically also be more diligent about assessing you as a borrower. While traditional dealerships rarely call your employer or ask to see bank statements, a car dealership that specializes in bankruptcies will likely do their due diligence to confirm that you are employed and check your income. Some might even look into the stability of your residential situation.
How Do You Get a Car Loan In Bankruptcy?
You will need to work with your attorney or, at the very least, the courts during this process. (P.S. if you have an attorney, they can likely provide you with a list of car dealerships that work with bankruptcies). Technically, during bankruptcy, you aren’t supposed to take on new loans. So you will have to present a case to the courts proving that you do need this vehicle. You might need a car in order to make a living. It’s possible you had a car that broke down, and the repairs would cost more than a new vehicle. Maybe there are limited public transportation options in your neighborhood, so getting your own car is your only way to get around.
In addition to proving that you need a car, you’ll need to show that you can make the payments. The court will want to see the offer from the dealership, including the agreed-upon price of the car, the monthly payments, and the interest rate. Like with any car deal, the lower you can negotiate either or all of those terms, the better. You will need to show the court your plan for making these payments and how you’ll manage your other financial obligations in the meantime. In some cases, you might need to adjust your repayment plan for your bankruptcy if some of the down payment or monthly payments for the vehicle will affect that.
The motion to take out a car loan will need to be approved by the court before you can finalize the deal with the car dealership. Again, car dealers that work with bankruptcies are familiar with this process and understand that it takes some time.
You Still Have Choices as a Subprime Borrower
You might feel as a buyer in bankruptcy that you are at the mercy of subprime lenders and have to accept whatever they offer you. This is not true. These car dealerships and lenders are still businesses, and they specialize in working with buyers like you. They want your business, so don’t be afraid to try to negotiate on the terms they’re offering you. And, as you would with any car loan, shop around and compare rates between multiple dealerships that specialize in bankruptcy.
That being said, you do need to be prepared for the fact that the terms––including the rates and fees––will be far worse than they would be if you were not in bankruptcy. You are considered a “high-risk” borrower, and lenders mitigate their risk by making the terms more favorable for themselves. You could face some sticker shock when you see the terms offered by dealers that work with bankruptcies.
The Bottom Line Is That There Is Hope
Don’t think for one second that going into bankruptcy means having your hands completely tied in everything you do. The courts don’t want to ruin your life, and they are willing to work with you. They understand that even people in bankruptcy sometimes still need a car and that they can’t afford to buy one in cash. If you can prove to them that you do need a vehicle to make a living and that you have a plan to make the payments, they will often grant your motion to let you apply for a car loan.
While many traditional car dealers and lenders won’t work with you in bankruptcy, there are those who specialize in working with buyers in your exact situation. Ask your bankruptcy attorney for a list of recommendations. Within that list, shop around and compare rates and terms. Be prepared for it to be a longer and more tedious process than you’re used to, but in the end, you could get a car loan, so you can be driving again.
Financial mishaps can happen to anybody, and bankruptcy doesn’t have to mean that you are powerless in making the moves you need to continue your life and business, like buying a vehicle. Find a compassionate, professional car dealership that works with bankruptcies, and you could find yourself behind the wheel of a new car.
