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Filing for bankruptcy may be the best decision for some, but it does come with a lot of long-term consequences. Both your finances and your credit score may suffer. But one of the biggest challenges you face may be finding auto loans after your bankruptcy. Whether you’re just starting or are in the recovery process, it may be a good idea to learn about how to get a car loan after bankruptcy.
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An important note: the following information isn’t intended to serve as legal or tax advice. SoFi always recommends that you consult your attorney and/or tax advisor for important financial decisions, like considering a bankruptcy or what to do post-bankruptcy—not a blog post.
Chapter 7 vs. Chapter 13 Bankruptcy
The type of bankruptcy you undertake can have a big effect on how your existing car is handled.
Chapter 7 bankruptcy, also called liquidation bankruptcy, poses the most risk to your vehicle because it involves liquidating your assets to pay your creditors. Basically, to be eligible for a Chapter 7 bankruptcy, you must show that you can’t reasonably pay off your debts with your disposable income. At that point, your nonexempt property (which might include bank accounts, valuable jewelry, or a second car, among other things) may be sold to pay off your debts, though you will be allowed to keep certain necessities, which are classified as “exempt.”
In some cases, you may be able to get an exemption to keep your car if you have some equity in it. Exemption rules vary by state. If you have a car loan (or your equity is considered nonexempt), then you have a few different options. Because the loan is secured by the vehicle, you’ll need to keep up with your payments in order to keep the car.
You may need to sign a reaffirmation agreement and outline your plan for affording the monthly payments. Otherwise, you can either surrender the car or redeem it. By surrendering, you remove your liability for the debt but the car will be repossessed by your creditor. By redeeming your car, you agree to pay a lump sum of the car’s market value rather than the remaining loan amount, but you get to keep the car.
Chapter 13 lets you keep your car (and your house), but you’ll be on a court-ordered repayment plan for three to five years. To be eligible for Chapter 13 (also called a reorganization bankruptcy), you must have a regular income and you can’t owe more than a certain amount of debt (as of 2021, the limit is $419,275 in unsecured debt or $1,257,850 in secured debt). In this kind of bankruptcy, the court will appoint a trustee and you’ll make monthly payments as determined by the court’s payment plan to the trustee, who will make payments to your creditors. Bear in mind that if you decide to buy a car while you’re in a Chapter 13 bankruptcy, you will need to get the court’s permission.
No matter which option you choose, it’s advisable to speak with a professional, like an attorney, if you have questions about what to do before declaring bankruptcy.
Considerations With Auto Loans After Bankruptcy
A major issue with finding after-bankruptcy auto loans is your credit score. A Chapter 7 bankruptcy stays on your credit report for 10 years, and a Chapter 13 stays on it for seven years (since in the latter case you partially repay some of your debt). Once the bankruptcy hits your credit report, your credit score could drop. Someone with a 680 score could lose between 130 and 150 points, while a person with a score of 780 might find their score dropped between 200 and 240 points, depending on a number of variables, including your credit score prior to filing and how many accounts were included in the bankruptcy.
Getting a car loan after bankruptcy can come with challenges beyond the impact on your credit score. Lenders generally view applicants with a bankruptcy as high-risk since there’s a history of non-payment to other creditors. While there are lenders who focus on subprime borrowers, expect extremely high-interest rates to compensate for the risk.
Pre-planning to Get Approved for a Car Loan After Bankruptcy
You can prepare yourself for applying for auto loans after bankruptcy in a number of ways. One possible route is to start working to rebuild your credit as soon as possible. Another strategy that may help you get approved for a car loan after bankruptcy is to save up for a large down payment. This lowers the lender’s risk and might therefore help lower your interest rate and your monthly payment.
Getting a Car Loan After Bankruptcy
Comparing multiple auto loans after bankruptcy can help ensure that you’re getting the best deal possible for your financial situation. Lenders’ rates and terms can vary significantly, so take the time to shop around.
It’s also a good idea to keep your potential auto loan ask as low as possible. In addition to saving up for a sizable down payment, consider focusing on lower-priced vehicles as one way to potentially improve your chances of getting approved. Finally, you could consider getting a cosigner with good credit, if possible. This does mean that your cosigner shares equal responsibility for the loan. But you’ll likely have better odds of getting approved.
Where to Find Auto Loans After Bankruptcy
There are many potential sources for after-bankruptcy auto loans. A local bank or credit union may have more flexible lending requirements to help you qualify, especially if you have an existing relationship with it already. Just beware of predatory lenders with exorbitant fees and interest rates.
Can You Refinance a Car After Bankruptcy?
A bankruptcy can impact your ability to refinance an existing car loan just as it can affect taking out a new one since your credit history is a primary factor in both applications. That doesn’t mean it’s impossible to get approval. And you may still be able to save on your interest rate.
Figuring out how to refinance an auto loan after bankruptcy involves many of the same challenges as buying a new car. Compare offers from online lenders and local financial institutions to find the best deal for you.
Refinancing a car can cost money, typically in the form of lender fees and title fees. While the amounts may not be huge (especially if you’re saving on interest), they can add up, especially if you try to refinance your car loan multiple times. Always weigh the pros and cons of refinancing your auto loan after bankruptcy to make sure the process meets your overall financial goals.
It may be harder to get an auto loan after bankruptcy, but it doesn’t have to be impossible. And the process itself isn’t all that different from the one you would use if you hadn’t gone through bankruptcy. Consider budgeting not only for a down payment, but also to look longer and harder for an acceptable interest rate.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans) This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Student Loan Refinance:
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 01/31/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from Caribou. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
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