Almost every person who comes into our office for a free bankruptcy consultation with one of our attorneys asks the same question, “Will I lose property if I file a bankruptcy?” After our attorneys address this common bankruptcy question (most debtors keep all of their property), one of the next common follow up questions from the person is, “Is it difficult to buy a car after bankruptcy?”
It is completely natural for a person to fear losing assets and to be nervous about buying a car after bankruptcy; however, these are two common misconceptions about filing bankruptcy. Misconceptions about filing bankruptcy often hurt people by causing them to delay the inevitable longer than necessary or beneficial.
In reality, the great majority of debtors retain all of their property when they file for bankruptcy relief while discharging most, if not all, of the person’s debts. With regard to buying a car after filing bankruptcy, it is also a common misconception that buying a car will be very difficult if not impossible.
How Filing Bankruptcy Helps Improve Your Credit Score
Filing a bankruptcy case can positively affect your credit score and actually makes it easier for you to find a lender who is willing to finance a vehicle compared to before you filed a bankruptcy case. Lenders view debtors who have successfully completed a bankruptcy case as having more money to put towards paying a car loan; therefore, your current financial situation looks more positive than it did before you filed bankruptcy.
Filing a bankruptcy case will result in a decrease in your creditor score; however, this is only temporary. Your credit will begin to improve within a year after your bankruptcy case is closed. When you file a bankruptcy, creditors must cease reporting negative information on your credit report such as late payments, over-the-limit balances, and negative information about your past performance or history. Removing negative reporting history will greatly help you improve your credit score.
Another large element of your credit score is your debt-to-income ratio. Once you receive your bankruptcy discharge, creditors must show the accounts discharged as having a zero balance. This increases your debt-to-income ratio making you look much more attractive to car lenders. As you work to improve your credit history by making on-time payments on debts after your bankruptcy, your credit score will continue toimprove.
Tips for Buying a Car After Filing Bankruptcy
Some people receive advertisements within weeks of completing their bankruptcy from car dealers; however, it is better to wait a few more months if possible before buying a car after bankruptcy. You can always find a car dealer who will finance a car after bankruptcy; however, you will pay a much higher interest rate and the vehicle purchase price may substantially exceed the value of the vehicle. These types of car dealers are trying to take advantage of people who are buying a car after bankruptcy. You can do better!
If possible, wait until at least 12 months after the bankruptcy discharge to begin your car search. By working on your credit rating during this first year (see our blog on improving your credit report for more tips), your credit score should improve; therefore, you can obtain a more reasonable interest rate . Waiting for a year also allows you to save money for a substantial down payment. The higher the down payment the more likely you will be able to finance the remaining purchase price.
Do your research in advance. You need to research dealers as well as various manufacturers to find the best deals being offered. At the end of the model year, you will find some of the largest rebates as dealers and manufacturers want to move last year’s inventory to make room for the new models. During your research, keep in mind that you want to be practical in your choice of a vehicle. You should not be aiming for the top of the line. A gently used, older vehicle is a good place to begin for a few years and then you can upgrade to a newer vehicle once your credit rating has increased.
If possible, avoid big banks and finance companies when applying for car loans. You are likely to find a better deal if you use a local credit union or local bank(use the first year after bankruptcy to establish a great relationship with one) or ask the dealer to find a lender. The dealer has access to multiple lenders and the dealer is very motivated to find you an offer that you can accept so the dealer can close the sale.
The Bottom Line . . .
Even though you can proceed with buying a car after bankruptcy, you must first determine if this is the best financial move for you. Prepare your monthly budget to determine if a car payment will be possible and, if so, the maximum amount of the car payment. You do not want your budget to go into the negative again due to a car payment; therefore, be realistic and reasonable when you are deciding to buy a car after bankruptcy.
If you are struggling with bills you cannot pay, sign up for a free bankruptcy consultation with Kain & Scott, P.A. to determine if filing bankruptcy is the best way to resolve your debt problems. We will discuss all available consumer debt solutions to help you reach a decision that is in your best interest.