How To Buy A Car With An Open Chapter 13
Things happen, and sometimes you need a new car while youre in the middle of a Chapter 13 bankruptcy. Three or five years is a long time to wait, but, luckily, theres a way to finance a vehicle during this time, it just make take a while to get approval from the court.
In order to successfully finance a car during a Chapter 13 bankruptcy, you need to visit two people: a dealers special finance manager and your trustee.
What Happens To Your Car In Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy can clear some unsecured debts, but it may also require selling or giving up some assets to pay debts. The items that are exempt from liquidation, and the value that can be exempted, varies by state.
If you file for Chapter 7 bankruptcy and local bankruptcy laws allow you to exempt all of the equity you have in your car, you can keep the vehicleas long as you’re current on your loan payments. And if the market value of a vehicle you own outright is less than the exemption amount, you’re in the clear.
To determine how much equity you have in the vehicle, subtract your current loan balance from the car’s value. Because vehicles tend to depreciate in value fairly quickly, you may not have much equity unless you’re nearing the end of your loan term.
Once you’ve determined how much equity you have in your vehicle, take a look at what the motor vehicle exemption is in your state. If you have less equity than the exemption limit, the car is protected. For example, if your state’s exemption limit is $4,000 and you have $3,500 in equity in your vehicle, you can keep it.
If the equity in your car exceeds the exemption limit, a few different things can happen.
Every Recession Is Different And The Pandemic Recession Is Bizarre
Most every recession has been accompanied by a significant increase in personal bankruptcy filings . But remember its what is called a lagging indicator, meaning it takes a while for bankruptcies to rise after a recession hits. Unemployment is also a lagging indicator of recessions. For example, in the Great Recession that began in December 2007 unemployment was 5%. It took nearly two years of gradual job loss for the unemployment rate to march slowly up to its peak of 10% in October 2009. Bankruptcy filings tend to lag even further behind, which is why the peak in bankruptcy filings didnt come until a later in 2010.
But comparing the current pandemic recession to the Great Recession might be like comparing apples and oranges. Take a look at the graph below and youll see for yourself :
Look how different the shapes of the unemployment rate line is between the two recessions. It took two years for unemployment to reach its peak of 10% and then started its steady march down to record lows just before the pandemic hit.
Based on what happened in the Great Recession, which was a peak in bankruptcy filings about a year after the peak in unemployment, you might be tempted to predict that the peak in bankruptcy filings will come in 2021. But its not clear its going to happen any time soon, or at all. This is unchartered territory in terms of how unique this recession is.
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How To Purchase A Car After Filing For Bankruptcy
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There are plenty of reasons why people file for bankruptcy, but in every case the filers credit suffers a huge blow, making it difficult to finance big purchases. On the bright side, finding a creditor to issue a loan for a vehicle is not impossible, and in some cases it might be easier than youd expect.
Whatever your bankruptcy situation, it can be a long road to recovery to repair the damage your credit incurs; and, depending on the filing , there is a lot of information regarding the legalities of each. Knowing your rights for each case is key to both avoiding more damage to your credit, and to getting the best deal you can when buying a car.
Bankruptcy laws vary from state to state, and its very important to know what the laws are within the state you file. That said, understanding the full scope of your financial situation is important, so you can purchase the right vehicle for you under the best circumstances your situation can offer.
Buying A Car After Completing A Chapter 7 Is Definitely Possible And Not Uncommon
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The longer that you can wait to make a large purchase after receiving your discharge, the better off you will be. 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 tostart rebuilding almost right away.
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.Â;
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What Type Of Mortgage Can You Get After Bankruptcy
Its technically possible to get any type of mortgage loan after a bankruptcy. There are no rules in place that permanently exclude you from getting a certain type of loan because youve gone through a bankruptcy. As long as you meet the waiting period discussed above, youre free to apply. But you can qualify for some types of mortgage loans much easier than others.
An FHA loan could be a great option if you have a bankruptcy on your record. FHA waiting periods are shorter than other types of loans. If you have a Chapter 13 bankruptcy, theres no waiting period at all after a court dismisses or discharges you. FHA loans also have looser requirements compared to other types of government-backed loans.
One of the major benefits of getting an FHA loan after a bankruptcy is its lower credit requirements. Even after a court dismisses or discharges your bankruptcy, it will still negatively influence your credit score. A Chapter 7 bankruptcy will stay on your credit report for 10 years, while a Chapter 13 bankruptcy will stick around for 7.
During this time, your credit score will be much lower than before your bankruptcy. You can buy a home with an FHA loan with a credit score as low as 580 points. You may even qualify for a loan with a score as low as 500 points if you have a down payment of at least 10%. However, at Rocket Mortgage®, the minimum credit score is 580.
Part 1 Of 2: Make Sure You Understand Your Bankruptcy Situation
Step 1: Determine the type of bankruptcy you have filed for, and your obligations. Dont take any steps towards buying a car until you know what type of bankruptcy you have filed for and you understand your obligations to the creditor, so you can consider your best options before you make a purchase.
- Tip: You might want to consult with a credit specialist or financial planner to help you better understand your financial and credit situation at the beginning of your bankruptcy, and to help with future planning and goal-setting.
Step 2: Know your rights under your states Chapter 7 or Chapter 13 bankruptcy laws. The major deciding factor for what chapter of bankruptcy you file under is determined by your income level.
Your situation also varies based on what you owe to creditors and what type and how many assets you have.
In most cases regarding Chapter 7 bankruptcy, all your nonexempt assets will be liquidated to help pay your outstanding debt.
Nonexempt assets include non-essential items you have that might be worth something, including expensive jewelry and clothes, musical instruments, appliances, expendable cash, and any additional vehicles other than the one the creditors determine you need.
Under Chapter 7 or 13, if you have a reasonable vehicle you will most likely be able to keep it. But under Chapter 7, if you have a luxury vehicle you might be made to sell it, buy a cheaper vehicle, and use the leftover money to pay off debts.
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Can I Buy A Car After Filing For Chapter 13
Securing a car loan is possible after, and in some cases during, a Chapter 13 bankruptcy case, which stays on your credit report for seven years after filing. Chapter 13 bankruptcy, also called a wage earners plan, allows individuals to pay back part or all of their debts through installments made over a term of three to five years. Interest rates and balances on debts are negotiated. A trustee receives the payments and disburses them to creditors as agreed.
During the repayment period, borrowers need to secure court permission to get a car loan. Individuals also have the option to wait until the repayment period is complete before seeking a loan. Chapter 13 demonstrates a good faith effort to repay debts and can be looked upon favorably by potential creditors.
Should You Buy A Car After Bankruptcy With Cash Or Credit
The option you choose will depend on your circumstances and resources. You might find that after filing bankruptcy and discharging debts, you have extra disposable income. If you’re able to save up enough cash after your bankruptcy case, using it will likely be the cheaper option. For example, the bankruptcy may have stopped a judgment creditor from garnishing from your paychecks, or you might not have to make or debt installment payments any longer, including old car loan lenders. Also, as long as your bankruptcy trustee didn’t claim an interest in your federal or state income tax refunds, you could get extra cash from these refunds.
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Average Interest Rates For Car Loan After Chapter 7
Filing either Chapter 7 or 13 have roughly the same effect on credit scores. However, chapter 7 filers cant file again for another eight years, which shows a lower risk of debt being charged off. Each of the two types of bankruptcy has its advantages and disadvantages.
The higher the borrowers credit score before a bankruptcy filing, the farther it will drop after the filing. Borrowers with low credit scores before bankruptcy may not see their scores fall as far. The reduction in credit score is also based on the number of accounts included in a bankruptcy filing.
Interest rates on car loans are tied to credit scores from the three major credit bureaus: TransUnion, Experian, and Equifax. Credit scores range from 300 to 850, with 300-500 considered deep subprime and;501-600 considered subprime.
Used cars carry a higher interest rate since they have less value and provide less collateral for the loan. Rates for deep subprime borrowers can be around 19%, while subprime borrowers rates can be about 16%. New cars have more collateral for a secured loan and have lower rates for those who qualify. Rates for deep subprime are around 14%, and for those with subprime credit scores, the rate is about 11%.
Getting Approved For A Car Loan After Bankruptcy Is Difficult But Its Not Impossible With A Little Extra Work You May Be Able To Finance A New Set Of Wheels Sooner Than You Think
If youve filed for bankruptcy or are considering this option, you may find yourself having trouble getting approved for credit, including a car loan.
Lets take a look at how filing for a Chapter 7 or Chapter 13 bankruptcy could affect your ability to get a car loan, and steps you can take to help increase your chances of loan approval.
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How Long After Bankruptcy Can You Get A Car Loan
You can get a car loan immediately after filing bankruptcy. In fact, youâll probably get quite a few ads from auto lenders and car dealerships even before your 341 meeting takes place. The key is to be smart about it and if you can, wait before getting a new car loan.
Why does it make sense to wait?Â;
You want to make the most of your fresh start and the best way to do so is by setting yourself up for best loan terms for your auto loan.Â;
Getting better terms, like a lower interest rate, is hard with bad credit and a low credit score. Immediately post-bankruptcy, you likely have bad credit. As a result of your subprime credit rating, the loan terms youâll be offered for this new debt wonât be ideal.Â;
But, youâre also closer to having good credit than you were before your bankruptcy filing. Your bankruptcy filing gives you the chance to build a good credit history. And, good credit = better terms.Â;
For now, if you had a repossession or surrendered your car and need a replacement before you can build up a better credit rating, ask yourself this:Â;
Can I buy a cheap car for cash to get through the next 6 – 12 months?Â;
The car you can afford now may not be pretty, but if it gets you around itâll be worth it in the long run because it buys you time to:
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rebuild your credit , and
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save up money for a down paymentÂ;
Buying A Car During Bankruptcy
Because the Chapter 7 process is so short, it is unlikely that you will be able to purchase a vehicle while your case is open.
During this time, your credit will be on hold. This prevents creditors from taking any actions to collect debt, such as making threatening phone calls or pursuing lawsuits. On the other hand, any new debt you take on during this time, such as opening a new credit card or signing a car loan, is subject to approval by the bankruptcy court. This is something that most creditors will not be willing to risk. If you can afford to wait until after your debts have been discharged, you may have better luck finding a lender.
If you are in a Chapter 13 repayment plan, you may have better luck obtaining a car loan. Because a lot can change during the three or five year repayment period, its slightly more common to have debtors attempt to take on a car loan while their bankruptcy case is still open. The bankruptcy court will still need to approve any new debts during your repayment period, which means that you will need to file a motion, which your creditors can object to. Be prepared for this process to take four or more weeks, and for the judge to ultimately deny your request.
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Facing Debt Or Financial Problems
You can still regain control of your finances by reaching out to an experienced bankruptcy attorney in Washington. Let us help you resolve your financial issues skillfully, protect your assets with compassion, and utilize every means possible to achieve your desired results. Contact us for a free consultation today.
Need Help Finding A Dealer To Work With
If you’re denied by a lender during this process, you either have to start all over again or possibly even wait until your bankruptcy is discharged. Or, maybe, you just weren’t working with the right dealership.
It isnt easy finding a special finance dealer that knows how to handle bankruptcies, but we can take the stress out of searching for one. CarsDirect has a knowledgeable network of special finance dealerships that have the resources available to help people in many credit situations, including bankruptcy.
All you have to do to get started is fill out our auto loan request form and well work to connect you to a local dealer!
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Auto Loans After Bankruptcy May Build Your Credit
Besides the benefits that come with having your own car, making timely payments on a car loan after bankruptcy will help you build your credit, as long as the lender reports the activity to the main credit reporting agencies, states the CFPB. And if your credit history improves over time, there may be options to refinance your loan.
Consecutive Chapter 13 Bankruptcy Cases: 2 Years
The least amount of time possible between consecutive bankruptcy filings is with a Chapter 13. After a Chapter 13 discharge, you could conceivably attempt another in as little as two years from the date the first Chapter 13 was filed. However, most Chapter 13 payment plans take place over the course of 3-5 years, so a two-year interval is very optimistic because receiving a discharge before the three-year minimum repayment plan is highly unlikely.
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Be Careful Of Falling Back Into Debt
The final step is very important. You need to take measures to protect yourself from falling back into a vicious cycle of debt. When youre looking for a vehicle, especially for work reasons, it can be a very stressful process with a feeling of urgency. Unfortunately, there are predatory lenders who prey on vulnerable lenders. To mitigate this risk, be sure to do thorough research on the options which are available.;
A good approach is to wait to finance until you have rebuilt your credit. Use the mechanisms available to you, such as secured cards, and pay down your debt before taking on any more. Finally, it is important to budget for the real cost of the car . Consider the expenses including maintenance, insurance, registration, and fuel. Have a realistic budget so that you know what to expect in terms of the actual cost.;
Construct a detailed budget that considers your income and expenses. Factor in the projected expense of the vehicle and determine whether getting a loan is the right way to go. You can make adjustments to your situation by improving your credit . Alternatively, you can pursue a lower loan amount by adjusting the price range of the car youre seeking.;
