One of the reasons people file bankruptcy cases is to preserve vehicle ownership. If the client has a car loan, a chapter 13 case in which the terms of the vehicle loan can be re-set to make the payment more affordable is often attractive. Or some clients prefer the liquidation approach of a chapter 7, in which other, unsecured debts are discharged, thus freeing up money in the monthly budget to make the car payment easier to afford.
And many clients have paid-for vehicles. For these clients, the anxiety may be concern that the vehicle would not be protected in a bankruptcy - that the client might have to turn over the vehicle to the trustee appointed to administer the client’s case. There is usually good news for these clients - almost every vehicle is exempt under the bankruptcy law. So the anxieties of the car owner considering bankruptcy - whether someone with a car loan, or an individual that owns her car free and clear, are often unfounded.
But for a certain number of clients, the concern they does not have to do with retaining a vehicle. They have either had their vehicle repossessed and have found their credit so bad that financing the purchase of another vehicle at a reasonable rate of interest is not possible, or the terms of their car loan are so expensive, and the car is in need of such significant repair that retaining the vehicle is not economically smart. For clients in this category, the question isn’t, “can I keep my car?” - it’s “am I going to be able to buy a car?”
You can finance a car at any time after you file a bankruptcy - but it’s going to cost you!
The reality is there is a “sub-prime” market for car financing in the United States. The sub-prime market for motor vehicles functions like other sub-prime markets: customers take out relatively expensive loans so that the risks associated with lending to “high-risk” customers is covered. And with vehicles, the sub-prime market is open to almost anyone with a valid drivers license and a source of income. So the anxiety that people going through a bankruptcy that they are going to not qualify for financing is misplaced. But the problems faced by people with recent bankruptcies on their credit reports are high interest rates (as high as 20% to 25% on some loans), and, because of how expensive interest is, the vehicles financed tend to be older and not as reliable. If plunging into the sub-prime market doesn’t appear attractive (and it isn’t attractive to a lot of people), what should the customer with a recent bankruptcy do?
The best advice: be patient
Keeping the car you have running, even if the car requires expensive repairs, rather than trading the current car in, is often the best route to take when faced with car problems. The fact of the matter is the longer a bankruptcy debtor can go after a discharge before he goes out looking for a car, the lower the interest rate the debtor will pay and the higher quality the car he will finance.
If it’s not possible to wait, then activating your patience takes on a different context: shop around. If a bankruptcy discharge is in the relatively recent past, don’t be surprised if a number of dealerships tell you that you simply don’t qualify for financing (quick aside: this is for people who have recently received a chapter 7 discharge; people who have a chapter 13 discharge do not, as a rule, face these problems). So shopping on the internet and sending emails or making phone calls to dealerships before you visit them is a sound strategy. If a dealership isn’t going to help you, there’s no point wasting time driving to the dealership to find that out. But if you look patiently enough, you can usually locate a dealership that will work with you.
A co-signer can help
If there is a relative or a friend who is willing to co-sign a loan, financing will usually open up, even if there’s a recent bankruptcy case on your record. But do the co-sign thing extremely carefully - family relations and friendships are usually far more valuable than a car - don’t risk damaging a long-term relationship by talking someone into co-signing a loan you can’t afford to pay.
Your second loan will be better
For many people, financing an older car at a higher interest rate - but with an affordable payment - is the only real option. But don’t despair. As long as you can afford the payment - and you make the payments on time, market-rate financing should be available to you 12 months or so after you take out the expensive loan. Getting to that second loan is the key.
At Kain & Scott, we want to help our clients get their life back - so that means that we’re there to help even after your bankruptcy case is over! Don’t hesitate to contact us if you need help and direction in making sense of vehicle financing.