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Can I Buy A Car After Bankruptcy in 2020?

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In a Nutshell

Buying a car after completing a Chapter 7 is definitely possible and not uncommon. The longer that you can wait to make a large purchase after receiving your discharge the better off you will be.

Written by Attorney Eva Bacevice.  
Updated September 23, 2020


Yes, but it makes sense to wait as long possible as you can after receiving your discharge.

What is a Chapter 7 bankruptcy?

Most individual bankruptcy cases filed are Chapter 7 cases, which are also referred to as a “fresh start.” The good news about Chapter 7 is that it should result in a discharge of your debts, and usually only takes between four and six months from start to finish. Any bankruptcy will stay on your credit report for 7-10 years. This does not mean, however, that you are unable to make any large purchases after filing or that you would need to wait 7-10 years to buy a car.

What can I do about my car during my chapter 7 bankruptcy case?

If you already have a car loan that you are up-to-date on at the time you file for a Chapter 7 bankruptcy, it is very likely that you can keep the car and maintain your payments. It will depend on two main factors beyond being current on your payments: (1) whether your car can be protected under the bankruptcy vehicle exemption and (2) if your lender will offer you a reaffirmation agreement. Remember, this is only available to you if you are up-to-date on your payments at the time of filing.

Vehicle Exemption

First you need to determine if the equity that you have in the car is something you can fully protect with bankruptcy exemptions in your case. Remember that the purpose of a Chapter 7 is to offer a fresh start for moving forward. It would be very hard for your bankruptcy to feel like a fresh start if you were left with nothing. Exemptions refer to what types of property you can keep during a bankruptcy and they depend on the value of the property. The equity for a car with a loan often falls within the acceptable limits to fully protect. You can determine the equity by taking the money you owe on a loan, if any, minus the value of the vehicle. Cars depreciate in value very quickly. So, many people’s cars fall within the allowable protection levels.

Reaffirmation Agreement

Second, are you willing to sign and is your lender willing to offer a reaffirmation agreement? Remember that a Chapter 7 case will discharge all of your debts, even things you are current on. That includes discharging your current car loan. Signing a reaffirmation agreement means that you want to keep your car and still be responsible for the payments. Most reaffirmation agreements are for similar terms as before with the length of the loan and the same payment. The reaffirmation agreement simply ensures that the debt will survive the bankruptcy.

What if I’m not current on my car payment when I file a Chapter 7?

If you are not current on your car payment at the time that you file for bankruptcy you will likely have to surrender the car in the bankruptcy. The good news is the debt will be discharged so you will not usually have to pay any additional fees or the remainder of your loan. The only way to keep a secured asset that you have fallen behind on in a bankruptcy is to file a Chapter 13 case instead. A Chapter 13 repayment plan will include both the missed and ongoing payments.

Filing a Chapter 13 instead would require proving to the court that you are able to afford and maintain payments into the case for the life of the plan, which may not be feasible. Additionally it is a much longer process (generally three to five years) and is more complicated to file.

If you’re behind on your car payments and want to keep your car, it’s probably best to talk to an attorney about filing a Chapter 13 case.

Can I buy a car during my Chapter 7?

Yes, you can. Find out more here.

Can I buy a car right after I finish my Chapter 7?

The reality is that you can always find someone willing to sell you almost anything, regardless of having just filed a bankruptcy. Sellers will, however, likely see you as a higher risk when you are fresh off receiving your discharge. As a result of that, they are likely to charge a higher down payments and a higher interest rate. This is where you need to be careful and make certain that you are still getting a good deal.

Predatory lenders will take advantage of the fact that it might be hard to get a loan after your bankruptcy case. Knowing that it can be difficult, they can charge incredibly high interest rates on a loan they are willing to give you, because they expect you do not have other options.

There are steps that you can take to put yourself in the best position possible for a big purchase like a car.

How can I get the best deal despite a recent bankruptcy?

Of course if your car is unsafe or requires a costly repair, you may need to get a new one earlier than you had hoped.

Before you buy:

  • Manage your expectations. Although everyone fantasizes about a brand new car and/or an expensive model, shopping for a reliable used car can significantly lower your total costs and monthly payments.

  • Explore all of your options. Check with different banks and credit unions to see what type of loan you can qualify for and get pre-approved.

  • Know what you can afford before you shop. Practicing realistic budgeting will be the key to unlocking your financial future after your fresh start.

When you decide to buy:

1. Rebuild your credit for as long as possible. The longer you can wait, the better. If your current car is paid off and still running it makes a lot of sense to hold on to it as long as you can. This will allow you to make the most of your fresh start and apply for a car when your credit is stronger. While a bankruptcy does stay on your credit report for 7-10 years, it also erases most of the other dings on your report and allows you to start rebuilding almost right away.

Obtain Secured Credit Cards. Many people chose to get a secured credit card with a low limit. If you are able to consistently use the secured card for small purchases every month and then pay off in full on time, this can go a long way in repairing your credit.

Build Your Savings. The longer you are able to wait the more money you can set aside for a rainy day or a down payment. If you’re saving for a home, being able to put down a larger chunk of money will reduce the overall size of the loan you will need to cover the rest of the cost. Additionally, you are more likely to get a better interest rate.

2. Pay on time After your discharge, making your car payments on time will also work to repair your credit. After you have been able to do so for a significant period of time (6 months or a year) you could look into a possible refinance of the loan. This means that you could negotiate a lower monthly payment or a lower interest rate on the rest of the loan. You will have built up good will and a favorable payment history during that time so it is entirely possible that you could renegotiate far better terms for the remainder of the loan.

3. Make sure to avoid “buy here, pay here” offers. The traditional method of buying a car involves a loan or line of credit from a bank or credit union.“Buy here, pay here” offers refer to car dealerships that will offer their own line of credit to prospective purchasers.

Although you shouldn’t be surprised to see a higher interest rate due to your bankruptcy, both subprime lenders and car dealerships that offer “buy here, pay here” deals are usually not designed to benefit you. They are designed to make the most profit.

“Buy here, pay here” dealerships often charge extremely high interest rates, up to 29%. Additionally, the cars tend to be lower quality and the seller is unlikely to offer warranties.

Buying a car during or after your bankruptcy is possible, but this advice is designed to help you get the best deal

Buying a car after completing a Chapter 7 is definitely possible and not uncommon. The longer that you can wait to make a large purchase after receiving your discharge the better off you will be.

Following the above suggestions can help ensure that you get the best deal possible. Remember that buying a used car and/or obtaining a car loan that you can afford without financial strain will help to build back up your positive credit after a bankruptcy and help maintain your financial health moving forward. 



Written By:

Attorney Eva Bacevice

LinkedIn

Eva G. Bacevice graduated from the University of Michigan Law School in 2001. She practiced law for close to a decade in the area of consumer bankruptcy. She now works in higher education as an Academic Advisor for undergraduate students at the Stephen M. Ross School of Business,... read more about Attorney Eva Bacevice

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