Buying a car in Chapter 13 bankruptcy: How to do it

It is possible to buy a car after Chapter 13 bankruptcy. But if you need to take out an auto loan, you’ll need to get court approval first.

The process doesn’t have to be daunting. Speak with your bankruptcy attorney for guidance on finding the right lender, then file a motion with the court. As long as you have a valid reason for the purchase, you may be permitted to take on additional debt.

That being said, it isn’t guaranteed. The court may reject your motion, and even if you are approved, consider your loan options carefully. Lenders are less willing to work with borrowers who are in the bankruptcy process. If you do find a lender, expect high interest rates — and be sure you can handle the additional monthly payment.

How to get a car loan while in Chapter 13 bankruptcy

If you have the cash to pay for a car, you can simply purchase a vehicle without going through the court. However, you may need to amend your bankruptcy schedule, so talk to your attorney first.

If you need to get a car loan while you are still on your repayment plan and before you’re discharged from bankruptcy, you can probably do so. Because the repayment plan does not include new debt, it will need to be modified.

According to Amy Lin, vice president of customer success at Money Management International, “The court recognizes that life happens, and it may be necessary to purchase a vehicle before the completion of the Chapter 13 repayment plan.”

She outlines four steps to take when you need an auto loan.

1. Make a new budget showing that you can afford the car payment

You will need to show that you can handle a car payment on top of your debt repayment and other financial obligations or responsibilities. “If the car purchase is going to impact other aspects of your repayment plan, work with your attorney to create a new proposed repayment plan,” says Lins.

Unfortunately, a low credit score will result in a high interest rate. The average auto loan rate for subprime borrowers is currently at 14.78 percent for new car purchases and 21.55 percent for used cars.

An auto loan calculator can help you estimate your monthly payment and see if it will realistically fit into your budget.

2. Find a lender that will work with Chapter 13 bankruptcies

Few lenders and car dealers will work with those in active bankruptcy, but they do exist, explains Lins. “Your bankruptcy attorney may be able to provide a list of lenders and dealers that will work with you, and you should check with your local credit union or bank.”

You may also need to find a dealer who works with subprime lenders to get the car financed. Despite slim options, do your due diligence and compare rates and terms from a few lenders. And because bankruptcy will damage your credit score, expect higher interest rates, fees, and less favorable terms.

Lins states that you need to have the offer, including the purchase price, monthly payment and interest rate in writing to provide to the court.

“Keep the purchase price as low as possible and wait to exit bankruptcy and rehabilitate your credit before purchasing a more expensive vehicle,” she advises.

3. File a motion with the court to purchase the car

To take on additional debt, you must file a motion with the court. This entails bringing your order and having a solid explanation of why you need to purchase a car and why you need financing.

Perhaps your last car broke down and the repairs are so significant that financially it makes more sense to buy a new car. Or you live in an area where public transit isn’t easily accessible. This step is something your bankruptcy lawyer can help with.

4. Complete the purchase

Once the motion has been approved by the court, you can then obtain your car loan and get your car. Make the purchase and begin paying the loan off with your other obligations. If you struggled in the past, learning to manage your auto loan may help you avoid missing payments or defaulting on your new loan.

Tips for getting a car loan after Chapter 13 bankruptcy

Once you complete your court-ordered debt repayment and get discharged, you won’t have to go through the courts to get your car purchase approved. If you can, try to make do with the car you have until you are at least six months past discharge, says Lins.

Improve your credit score

There are several ways to improve your credit score, including getting and responsibly using a secured credit card.

Applying for new credit is usually a bad idea when rebuilding your score, but it may be necessary. A small installment loan or credit card may help you create a positive payment history — and an auto loan could be a way to do just that. However, too many new accounts at once can be even more damaging, so be careful when seeking out additional debt.

Obtaining a secured credit card requires putting down a small deposit that acts as collateral. Your deposit becomes the credit line for your credit card. “Charging and repaying small amounts over time will help rebuild a positive credit history,” says Lins.

You can also look at services that will report rent and other bills, such as cell phone, utilities and streaming services to help you build or rebuild an on-time payment history, Lins recommends. “These services usually charge a modest fee, but some are free,” she says.

Monitor your credit

In addition to rebuilding your credit, keep track of your score and history. This will help you see the progress you are making and what improvements can be made. Monitoring your credit regularly can also help you spot errors that can ding your score down the line.

There are a few ways to get your credit score for free. You can order free reports from AnnualCreditReport.com or sign up for a free credit monitoring service. American Express, Bank of America, Discover and Wells Fargo — among others —  also offer a free monthly look at your credit score with their credit cards.

Shop around for a car in your budget

Shop for a car within your reasonable affordability range to ensure you stay on top of the payments. This, in turn, can help rebuild your credit and keep you on track.

Review your monthly expenses to determine how much a car payment your budget will allow. As a rule of thumb, car-related expenses, including the cost of gas, maintenance and insurance, should not exceed 20 percent of your total monthly budget.

You may also want to set a target price for your purchase using information available online through websites like Edmunds and Kelley Blue Book, which list new and used car prices as well as insurance cost estimates.

Opt for a shorter loan term

While it may mean a larger monthly payment, a short loan term is ideal whenever you buy a car. This is because interest has less time to accrue — so you pay less overall. A long loan term may be appealing, but you will inevitably spend more.

However, you need to balance it with a payment you can afford. If an 84-month loan term is the only way to get a payment that fits your budget, look for a different vehicle. A lower purchase price — and borrowing less — may improve your chances of approval and prevent you from overextending your budget.

Make a down payment

The larger your down payment, the less you’ll owe on it in the future. Lenders may also be more willing to approve you since you will need to borrow less overall.

Look at your budget and see how much you can reasonably afford to stash away each month toward purchasing a car. Ideally, you should save as much as possible, but it ultimately boils down to your income, expenses and existing obligations.

Alternatives to taking out a new car loan

If you are unhappy with the rates and terms offered for a bad credit car loan or are having trouble getting approved, consider other options.

• Shop for a lower-priced vehicle: Even if the interest is high, your overall payment and how much you owe monthly will be more affordable.
• Wait until your credit has improved: Once you rebuild your credit, you’ll most likely qualify for lower interest rates, fewer fees and more favorable terms.
• Pay entirely in cash: Saving up and paying cash outright for a car means you won’t have to apply for a car loan at all, which will save you in interest and fees.

The bottom line

Getting a car loan during Chapter 13 bankruptcy is possible. Find a lender and create a reasonable budget that allows you to continue your court-mandated debt repayments. It’s also important to shop around to find a car that fits within your budget.

After you are discharged from bankruptcy, you won’t need court permission to finance a car. But the first step is to rebuild your credit by setting up a track record of consistently making debt payments on time. “It’s an old saying, but time really does heal all wounds, even wounds to your credit score,” says Lins.