Filing for bankruptcy is a financially traumatic event that will have a long-term effect on your ability to borrow money. A Chapter 7, or liquidation, bankruptcy stays on your credit report for 10 years, and even a Chapter 13 reorganization will remain in your credit history for seven years after you complete your court-ordered repayment plan. Whether you can get an auto loan after bankruptcy is up to your bankruptcy trustee and the lender, but your chances are better if you know what lenders look for.
Trustee Approval
The result of filing for Chapter 13 bankruptcy is usually a three- to five-year repayment period during which you pay off much of your debt under a new agreement that the bankruptcy court requires and and your creditors to agree to. During this period, a court-appointed trustee oversees your case. If you want to borrow any money while in repayment, including an auto loan, you need the trustee's permission. If an auto loan would significantly affect your ability to repay your debt, the trustee can prevent you from getting one. However, if you have a stable income and have been paying off your debt on time, the trustee may agree to let you finance a vehicle.
Rebuilding Your Credit
Once you exit the bankruptcy process you're free to apply for any auto loan you choose, and lenders get to make the decision about whether to extend financing to you based on your credit history. Compared to other types of loans, such as credit cards, an auto loan is reasonably attainable since the lender will have the vehicle itself to act as security, meaning that if you fail to make your payments the lender can repossess your car and sell it to recover the money you borrowed. If you do get a car loan, you'll start rebuilding your credit history with each on-time payment until your bankruptcy finally disappears from your credit report.
Income and Security
Auto lenders, including commercial banks and the lenders that provide loans directly through car dealers, will be looking for certain things when you apply for a car loan with bankruptcy on your credit history. One of the most important factors is your income. A bankruptcy court won't allow you to reorganize your debt in Chapter 13 without a stable source of income, so if you have the same job when you apply for an auto loan you have an advantage in the eyes of lenders. On the other hand, a low-salary or a job in an unstable industry will hurt your chances of qualifying for a car loan shortly after bankruptcy.
Auto Loan Tips
There are several things you can do to convince lenders to extend you credit for a car loan despite the presence of bankruptcy on your credit report. The first is buying a used car that costs less than a new model. The less you owe, the more likely you are to be able to pay it back. For the same reason you should offer a large down payment so that you'll be borrowing less and also paying less in interest. If you can afford to wait until a dealer or lender offers a low promotional interest rate on car loans, you may find this to be an even better time since the lower rates translate to a more affordable monthly payment.
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