Buying a Car After Bankruptcy

Filing bankruptcy can give you the hope of a fresh start and financial freedom from debt. How soon you will have that freedom and what it will look like will depend on if you are filing a Chapter 7 or a Chapter 13.  Oftentimes, people are able to keep their cars by taking advantage of several available exemptions, but it is important to know what to expect  if you do try to buy a car after you file for bankruptcy. Purchasing a car right after filing bankruptcy is possible, but it may take some planning to save up for a down payment and may end up being more expensive than you expect with higher interest rates.


 Considering Options

For most of us, having a car is a necessity, however it is important to remember that a car loan is still debt. It may be the case that you don’t need the brand new car that you have with that large monthly payment. It may be a better option to have an older car that you are able to purchase outright and avoid that monthly payment. Public transportation is always an option for a season while you save up to make a wise purchase. Take your time to shop around and negotiate the best price for the car you want.

Saving up money for a car sounds good in theory, however 2/3 of people take out a loan when it comes time to purchase a car. When you have a bankruptcy on your record, you will be expected to provide a large down payment and will pay a much higher interest rate. If your credit score drops below 600, most likely you will need to work with a “subprime lender”. These lenders fund around 22% of auto loans, and around 10% of their loans end up being defaulted on. Because they have such a high default percentage, you could end up paying double the interest rate that you once would have paid prior to filing for bankruptcy. You may consider just saving for the entire amount of the car and end up saving thousands of dollars you would have paid in interest.

When you apply for an auto loan, each lender will take a look at your credit report. They will be looking to see if your low credit score is due to situational circumstances such as being laid off or having a medical emergency that you were unable to pay, or a divorce. If it is determined that that you have had a situation that has caused your credit hardship, you may be able to secure a reasonable rate on a loan. If you have habitual bad credit, such as having several missed payments over a long period of time, accounts in collections, or loans that you have defaulted on, the lender may require you to have a co-signer. If you purchase a vehicle where they provide the financing in-house, be prepared to pay much higher interest rates than you would expect.


Take Time to Research

Anytime you make a new financial commitment, make sure that you take a very close look at your budget to make sure you can actually afford the payments. Oftentimes, the money that you would have to commit to payments must come from another budget such as savings. Make sure you are willing to make that sacrifice and that it is in alignment with your long term goals. The last thing anyone wants, is to make the same mistakes and get right back into debt you just got freedom from.