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5 min read Published June 22, 2022
Writer: Jackie Lam Written by Contributing writer Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans. Written by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances through providing precise, well-studied and well-researched data that breaks down otherwise complex topics into manageable bites. The Bankrate guarantee
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We are compensated in exchange for the placement of sponsored products and services, or through you clicking certain links posted on our site. This compensation could impact how, where and in what order products appear within listing categories and categories, unless it is prohibited by law for our loan products, such as mortgages and home equity and other home lending products. Other factors, such as our own proprietary website rules and whether or not a product is offered in your area or at your self-selected credit score range could also affect the way and place products are listed on this site. While we strive to provide an array of offers, Bankrate does not include information about every financial or credit product or service. If you make an application for Chapter 13 bankruptcy — also known as repayment bankruptcy — your credit score will be affected and will remain on your credit score up to seven years. When you file Chapter 13 bankruptcy, you enter a repayment plan approved by the court, says Amy Lins, vice president of enterprise learning for , a nonprofit credit counseling agency that is based within Sugar Land, Texas. “This repayment takes place over a period of three to five years, which includes not taking on new debt,” says Lins. “However, the court recognizes that life happens, and it may be necessary to buy an automobile prior to the end in the Chapter 13 repayment plan.” It is possible to get an auto loan however, the options are limited. How do you get a car loan when you are in Chapter 13 bankruptcy If you have the cash to pay for the purchase of a vehicle, you could buy a car for money without having to apply to the court. You may have to amend your bankruptcy schedule and consult with your lawyer prior to making any changes. If you require a car loan while you are still on your repayment plan and prior to the discharge of bankruptcy, you may be able to be able to do it. There are four steps you can do, as explained by Lins. 1. Create a new budget to show that you have the funds to make the car payment You’ll need to prove that you are able to juggle your debt repayment, other financial obligations and responsibilities and the payment for the car. “If the car purchase is likely to affect other aspects of your repayment plan, work with your attorney to create a new proposed repayment plan,” Lins says. Lins. 2. Find an lender who can work with Chapter 13 bankruptcies There are few lenders and car dealers who can work with individuals in an active bankruptcy, however, there are a few who will, explains Lins. “Your bankruptcy lawyer may be able to give you a list of dealers and lenders that can work with you, and you should check with your local credit union or bank.” And because your credit score will take a hit from bankruptcy, expect higher interest rates, fees and terms that are less favorable. Also, you’ll need to find an auto dealer that works with you to get the vehicle financed. Even though your options are slim take your time and look at rates and terms offered by various lenders. The offer must be submitted with the price of purchase, the monthly installment and interest rate in writing and submitted for the courts, says Lins. “Keep the price of your purchase at a minimum and then wait until you are able to discharge bankruptcy and rehabilitate your credit before buying a larger vehicle,” she says. 3. File a motion with the court to purchase the car In order to take over the car loan while still paying back your debt and settling it, you’ll have to file a motion with the court in order to get it accepted. This entails bringing your order and presenting a convincing argument for why you’re required to purchase a vehicle and why you’ll have to obtain financing in order for this. Perhaps your car was damaged in the last down, and the repair costs are so significant that financially it is more sensible to purchase a brand new vehicle. Perhaps you live in an area in which public transportation isn’t readily accessible. This step is something your bankruptcy lawyer can help with. 4. Make the purchase after the purchase is approved by the court, you are now able to apply for a car loan and then get your car. Start paying the loan off with your other obligations. How to get a car loan after Chapter 13 bankruptcy Once you have completed your court-ordered debt payment and you are discharged, you don’t need to apply to the courts to be approved. And, if you are in a position to, take advantage of the car you have until you’re at least six months past discharge, says Lins. Enhance your credit score There are many ways to do this get credit, one of which is using a secured credit card. Obtaining a secured credit card involves making a small down payment that acts as collateral. Your deposit becomes the credit line of credit cards. “Charging and paying small amounts over time can help rebuild an excellent credit score,” says Lins. You can also look at companies that can report rent and other bills, such as cell phone and utility bills, as well as streaming services to help you create or maintain an punctual payment history, according to Lins. “These services usually charge an affordable fee, however they can be free,” she says. “Using your rental and utility bills to establish credit history could be a good strategy to jump-start the rebuilding process.” Check your credit Besides rebuilding your credit, you’ll need to keep track of it. This will help you see the progress you’re making and the kinds of changes that can be made. Additionally, keeping track of your credit regularly can help you spot errors which could affect your credit score later on. You can order free reports from AnnualCreditReport.com or sign up for a free credit monitoring service. Many credit cards also offer a free monthly look at your credit score. Look around for the right car within your budget. Be sure to choose an automobile that is within the range of the budget you’re able to comfortably afford to ensure that you are on top of the payments. This can in turn help you rebuild your credit score and keep you on the right track. Check your expenses for the month to determine how much of a car loan your budget will allow. As a rule of thumb the car-related expenses should not exceed 20 percent of your total budget for the month — an amount that covers the cost of gasoline, maintenance and insurance. You might also wish to determine a budget for your purchase using information on the internet via websites like Edmunds and Kelley, which provide used and new prices for cars, along with estimates of insurance costs. Make a down payment The more you pay, the less you’ll have to pay for it in the near future. Review your budget and figure out the amount you can afford to stash away each month toward purchasing a vehicle. Ideally you should save as much as possible, but it ultimately boils down to your earnings as well as your expenses and obligations. Alternatives to taking out the new car loan If you’re unhappy with the rates and terms offered for an auto loan or you are having difficulty getting your loan approved at all look into other options. Shopping for a lower-priced vehicle. Even if the interest is very high, your total amount of payment and the amount you owe monthly will be less expensive. You can finance it later once your credit is better. Once you rebuild your credit score, you’ll likely be eligible for a larger range of car loans with lower rates of interest, fees , and better conditions. Pay in cash entirely. Saving money and paying cash outright for a car means you won’t have to get a car loan in any way that will save you in interest fees. But if you need to purchase a car earlier then later could require the loan . The bottom line Getting an auto loan in the course of Chapter 13 bankruptcy is possible. Find a lender who will work with Chapter 13 bankruptcies and create an appropriate budget that permits you to continue debt repayments and also pay for an auto loan. It’s also crucial to research the market to find the best car for your budget. Once you’ve been released of bankruptcy, finance options also exist. But the primary goal is to rebuild your credit score by creating an established track record of making debt payments on time. “It’s an old adage, however, time does heal all wounds, even wounds that affect your credit scores,” says Lins. Find out more
Written by a contributing writer Jackie Lam is a contributing writer for Bankrate. Jackie is a writer on auto loans. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to control their finances through providing precise, well-studied information that breaks down complicated topics into manageable bites.
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