Can You Buy a Car During Chapter 7 Bankruptcy? What To Know About Auto Loans

Can You Buy a Car During Chapter 7 Bankruptcy?

Yes, you can buy a new car while your Chapter 7 bankruptcy case is pending. That said, many filers choose to wait until their bankruptcy discharge has been granted so they have more negotiating power with the bank. 

After bankruptcy, the bank (or auto loan lender) is more likely to approve your loan because:

• You no longer have a lot of debt to deal with. 

• You can't file bankruptcy again for at least eight years.

• You’re likely looking to rebuild your credit (paying even closer attention to making timely payments than before).

That said, you may not get the best loan terms. In other words, you’re likely to have a high interest rate. Check out our tips on buying a car after bankruptcy below to figure out how to get the best deal.

Can You Refinance Your Car Loan in Chapter 7 Bankruptcy?

Traditional refinancing — where you replace your current loan with a new one at better terms — isn’t usually an option while your Chapter 7 bankruptcy is pending. However, there are two alternative ways to adjust your car loan: reaffirmation and redemption.

If you reaffirm your car loan, you agree to keep the original loan rather than having it discharged in bankruptcy. While reaffirmation doesn’t lower your balance, some lenders may be willing to offer better terms, such as a lower interest rate. The bankruptcy court is more likely to approve a reaffirmation agreement if the lender provides this concession, so it’s worth asking during negotiations.

The second option, redemption, allows you to buy your car for its current fair market value rather than what you still owe on the loan. Since most cars depreciate over time, this can be a good deal if your loan balance is higher than the car’s value. 

If you don’t have a lump sum to cover the value, don’t worry. To redeem a car, many people get a new loan for the fair market value amount. This works somewhat like a refinance, but it ensures you’re not paying more than the car is worth.

How Long After Bankruptcy Can You Buy a Car?

Technically, you can buy a car at any time, even while your bankruptcy case is still open. However, most people find it easier to get a car loan after their bankruptcy is discharged. 

A Chapter 7 bankruptcy usually takes about 4–6 months from filing to discharge. Once you receive your discharge, lenders may be more willing to work with you because you’ll have less debt and won’t be able to file Chapter 7 again for eight years.

If you need a car right away, you may still qualify for an auto loan while your bankruptcy is pending, but expect higher interest rates and stricter loan terms. If possible, wait at least six months to a year after your discharge. This can help you rebuild your credit and secure a better loan. 

During this time, focus on improving your credit score by making on-time payments for any remaining debts, using a secured credit card, and keeping your credit utilization low.

Tips for Buying a Car After Bankruptcy

Buying a car after bankruptcy can be a smart step toward rebuilding your credit, but it’s important to approach it carefully. By planning ahead and making informed choices, you can find a loan that fits your financial situation and sets you up for long-term financial success.

Here are our top tips for buying a car after filing bankruptcy:

1. Set a realistic budget: Figure out how much you can comfortably afford for a car payment each month, factoring in insurance, maintenance, and fuel costs. Just because a lender approves you for a certain amount doesn’t mean it’s the right financial decision.

2. Save for a down payment, if possible: A larger down payment can reduce the amount you need to borrow, which lowers your monthly payment and may help you qualify for a better interest rate. If possible, save up before shopping for a car.

3. Check your credit report: After your bankruptcy is discharged, review your credit report to ensure all debts included in your bankruptcy are correctly reported. A clean and accurate report can improve your chances of getting better loan terms.

4. Shop around for the best loan: Not all lenders treat post-bankruptcy borrowers the same way. Compare offers from banks, credit unions, and online lenders to find the best interest rate and terms. Credit unions often have better rates than traditional banks.

5. Consider a reliable used car: A brand-new car loses value quickly, which can leave you owing more than it’s worth. A reliable used car with low mileage can save you money while still meeting your needs.

6. Watch out for high-interest loans: Some lenders prey on people with low credit scores by offering loans with sky-high interest rates. Make sure you understand the terms before signing anything. If the interest rate is too high, it might be worth waiting and improving your credit before financing a car.

7. Consider a co-signer: If your credit score is low, having a co-signer with good credit can help you qualify for a better loan with a lower interest rate. Just keep in mind that your co-signer is legally responsible for the loan if you miss payments, so only ask someone who fully understands the risk.

8. Make payments on time: Once you get a car loan, make every payment on time. This will help rebuild your credit and improve your chances of getting better loan terms in the future.

Can You Keep Your Car in Chapter 7 Bankruptcy?

Many people filing Chapter 7 bankruptcy worry about whether they can keep their car. The answer depends on a few factors:

Is your car fully paid off? If you own your car outright, you may be able to keep it if it falls within your state's motor vehicle exemption limits. Each state has different rules about how much equity you can protect in a vehicle.

Are you still making car payments? If your car is financed, you typically have three options:

• Reaffirm the loan: You agree to keep making payments under the same (or possibly improved) terms.

• Redeem the car: You pay the current fair market value in a lump sum, often by getting a new loan.

• Surrender the car: If the payments are too high or you owe more than the car is worth, you can give it back to the lender and eliminate the debt.

If you’re behind on payments, keeping your car may be more difficult. If you don’t stay current on payments, you risk repossession. In repossession, the lender takes the car back because the loan is in default.

How Bankruptcy Exemptions Affect Your Car in Chapter 7

You can use bankruptcy exemptions to protect your car in Chapter 7. Most Chapter 7 filers can keep their cars thanks to exemptions.

💡 Exemptions are laws that protect certain assets, including your car, from being sold to pay creditors. 

Every state has different exemption limits, which determine how much of your car’s value you can keep. If you’re using the federal bankruptcy exemptions, you can also use the wildcard exemption. This generous exemption can be used to protect any personal property.

If you own your car outright and its value is within your state’s exemption limit, you can keep it. If it’s worth more than the exemption allows, the bankruptcy trustee may sell it to pay off debts.

If you’re still making car payments, exemptions apply only to the part of the car you actually own (your equity). As long as you stay current on payments and your equity is covered by an exemption, you can usually keep your car. But if you’re behind, the lender may still repossess it.

Can You Buy a Car While in Chapter 13 Bankruptcy?

Yes, but you’ll need court approval before taking on a new car loan. Since Chapter 13 bankruptcy involves a 3–5-year repayment plan, the court wants to make sure that any new debt won’t interfere with your ability to complete the plan.

If you need a car while in Chapter 13, here’s how the process usually works:

• Find a willing lender. Not all lenders finance car loans for people in an active bankruptcy, so you may need to shop around. Some dealerships specialize in working with bankruptcy filers.

• Explain why you need the car. The court requires a written explanation, called a letter of necessity, stating why the vehicle is essential, such as for work or medical appointments.

• Request court approval. Your bankruptcy lawyer (if you have one) will submit a motion to incur debt. This outlines the loan amount, loan terms, and how it fits within your repayment plan.

• Wait for a decision. The judge will review your request and approve it if they determine the loan is reasonable and won’t impact your ability to pay creditors.

If approved, it’s best to choose a reliable, affordable car with loan terms you can manage. A high-interest loan or an expensive car could make it harder to stick to your payment plan, so shop carefully.

Let’s Summarize…

You can buy a car during or after bankruptcy, but the best timing depends on your situation. If you're in Chapter 7, waiting until after your discharge can help you get better loan terms. If you're in Chapter 13, you’ll need court approval before taking on new debt. Keeping your car in Chapter 7 depends on the exemption amount available to you and whether you’re current on payments. If your equity is within your state’s exemption limits — or if you can use the wildcard exemption under federal law — you may be able to keep your vehicle.

If you're considering filing Chapter 7 bankruptcy and have a simple case, you may be eligible to use Upsolve’s free filing tool. If you need legal advice about exemptions, reaffirming a loan, or buying a car during bankruptcy, Upsolve can connect you with a bankruptcy attorney for a free consultation.