If you are thinking of filing for bankruptcy there are a number of things that you need to consider not the least of which is your ability to buy a car once the bankruptcy has been discharged.
The view from AutoNet Financial
Here at AutoNet Financial, we deal in bad credit car loans. We also find ourselves answering questions from customers about bankruptcy and how the process will affect the filer’s ability to buy a car once the bankruptcy has been completed. Here is a very short explanation that will attempt to answer some of those questions
Types of bankruptcies
For individuals in the United States, there are basically two types of bankruptcies – a Chapter 13 and a Chapter 7.
Chapter 13
The Chapter 13 filing establishes a court-appointed trustee. The trustee sets up a repayment schedule that must be adhered to during the length of the bankruptcy – normally three or five years. The amount of the payment and the length of time are determined by a number of things including the amount of property involved as well as the individual’s income and expenses.
As part of the Chapter 13, participants may have the choice as to whether or not they want to “cram” a loan. During this process, the court forces the lender to accept less than 100% of the amount owed on the loan. The “Cramming” procedure not only reduces the payment, it also reduces the overall amount the lender will have received when the secured asset is paid off.
Chapter 7
The Chapter 7 bankruptcy involves liquidating a debtor’s assets and distributing the proceeds to the unsecured creditors. Unlike a Chapter 13, a Chapter 7 can only be done once every 8 years. While most debts under a Chapter 7 can be liquidated, certain obligations, such as spousal support, back taxes owed and student loans, are exempt and cannot be discharged.
A Chapter 7 also allows the filer to “reaffirm” a debt. In other words, you can inform the court that you don’t wish to include a portion of your debt, such as a car, in the bankruptcy. By doing this, you retain the property, but you also must continue making payments on the loan throughout the bankruptcy and you continue to be responsible for the full balance on the loan after the bankruptcy has been completed.
Once either type of bankruptcy has been successfully completed, you will receive a discharge order. If the bankruptcy has not been completed successfully, you will receive an order of dismissal. In the context of how creditors look at a bankruptcy, a discharge is viewed as a positive sign while a dismissal can have a negative impact on your credit.
Repossession in bankruptcy
There are two types of repossession – voluntary and involuntary. A voluntary repossession occurs when the vehicle is brought to a place designated by the lender and surrendered. An involuntary repossession happens when a vehicle is towed away by a repossession service. There is no difference between the two as far as the credit bureaus are concerned. Both will show up on a credit report as a repossession.
Before you file
Before you file for bankruptcy, you need to know how lenders, specifically car lenders, look at your car loan history as it relates to a bankruptcy. In addition to the other items on your credit report, car lenders will zero in on how you treated your car loan during a bankruptcy. Here are some other points:
• If you are considering repossession, the timing can be critical. If there has to be one, it must be part of the bankruptcy. Lenders don’t like repossessions before or after a bankruptcy – especially after. A repossession before a bankruptcy could mean that you were using the bankruptcy to avoid paying any negative equity once the vehicle was sold by the bank at auction. A repossession after the bankruptcy means you didn’t learn your lesson and you still cannot handle credit. For the most part, a repossession outside of bankruptcy will prevent you from getting a car loan from any type of lender (including subprime) usually for the next few years.
• If you file for a Chapter 13 and “cram” your car loan, you will have very little chance to get a loan from the same lender for quite some time, if ever. If you don’t cram the loan, once you get out of bankruptcy the lender will look at your loan payment history as well as the rest of your overall credit history in determining whether to approve you for a new loan. If you did “cram” the loan, you will probably have to deal with a subprime lender once the bankruptcy is discharged.
• In order to apply for a car loan during a Chapter 13, you need to petition the trustee for an order to incur additional debt. Without this order, you are not allowed to apply for any loans during the bankruptcy.
• If you file for a Chapter 7 and don’t reaffirm your car loan, the lender has the right to repossess the vehicle. If this happens, don’t expect that same lender to give you an approval on another vehicle loan after the bankruptcy. If you do reaffirm the loan, the lender will look at your payment history before and during the bankruptcy – as well as your overall credit history – in considering you for a loan after your bankruptcy.
• If your Chapter 7 included a repossession and you need a car loan once the bankruptcy has been discharged, chances are good that you will have to apply for a loan with a subprime lender (sometimes called a bad credit car loan) as opposed to a regular lender.
Summary
If you want to have any chance at all of using your current prime lender, make sure that your bankruptcy does not include repossession. Even if you avoid repossession, there is no guarantee that that same lender will want to continue doing business with you. However, if there is a repossession involved, there is no way that same lender will give you another loan. Period.
At the same time, if there is a repossession and it is not part of the bankruptcy, you have very little chance of getting a loan from any bank – and that includes subprime lenders.
At AutoNet Financial, we help customers reestablish their credit by matching them up with dealers who specialize in bad credit car loans. For more information, visit our web site at www.autonetfinancial.com.
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