If you've recently completed a bankruptcy, you may be wondering if you can buy a car. In most cases, the answer is yes. Some people might have freed up enough income (because of discharged debts) to be able to pay cash for a vehicle. Most people will need a loan. But car loan lenders are often willing to let you finance a car after bankruptcy -- although you're likely to pay very high interest rates. Read on to learn the pluses and minuses to buying a car soon after bankruptcy.
You can purchase a car with cash or financing. One is not necessarily better than the other. Which option you choose will depend on your own circumstances and resources.
You may find that after filing bankruptcy and discharging debts, you have extra disposable income. For example, the bankruptcy may have stopped a judgment creditor from garnishing from your paychecks, or you may no longer have to make debt installment payments to creditors, including old car loan lenders. Also, as long as your bankruptcy trustee has not claimed an interest in your federal or state income tax refunds, you may get extra cash from these refunds.
If you are able to pay a large sum of money in cash for a car shortly after filing bankruptcy, and you had that money (or were entitled to receive it) on or before filing bankruptcy, you may have been required to list that cash as an asset on your bankruptcy petition. If that's your situation, consult with a bankruptcy attorney immediately.
If you don't have enough cash to buy a car, you may be able to get a loan despite having previously filed bankruptcy. Often, even before you get your discharge, lenders will be eager to extend you new credit. Car dealerships may have already mailed you sales cards and letters, inviting you to buy a car with credit. And you are probably eager to re-establish your credit. But be careful -- there are pros and cons to taking out a car loan so soon after bankruptcy.
Certainly, getting a loan can help you re-establish credit. It gives you an opportunity to make timely installment payments on a big ticket debt, which can help build a positive credit report. Financing may also be your best option if you need a car but don't have the cash to pay for it.
Unfortunately, many lenders -- subprime lenders and “buy here, pay here” outfits -- will see your bankruptcy as a bad credit mark, and charge you extremely high interest rates (sometimes as high as 29%).
These days, however, bankruptcy does not carry the stigma that it used to 20 or 30 years ago. Even more mainstream lenders and car dealers will not bat an eye over your bankruptcy and are open to doing business with you. You may even be able to finance a new car at a reasonable rate of interest, especially if you have a steady source of adequate income.
You should research various finance terms and options that dealers, car loan lenders, banks, and credit unions are willing to offer you in your area.
Whether you are using cash or plan to get a car loan, you should wait until after you have received your bankruptcy discharge, or after your bankruptcy case has been dismissed.
In a Chapter 7 case, you should get your Notice of Discharge from the bankruptcy clerk of court at least 90 days after your 341 meeting of creditors.
If you are in a Chapter 13, the process is significantly different. A Chapter 13 is a continuous proceeding that typically takes between three to five years to complete. If you need a new car while you are still in Chapter 13, you will need permission from the bankruptcy court before you can buy one. In most jurisdictions, this means filing a motion with the court. Consult with a bankruptcy attorney or talk to your Chapter 13 Trustee's office to get more information on how to do this.
Once you have received your Notice of Discharge or dismissal, the rule of thumb is simple: The longer you wait to get a new car loan, the better your interest rate will be. However, if you cannot wait, you may still be able to find a reasonable new car loan if you research your options.