Buying a car after bankruptcy is not impossible. In fact, after you file a bankruptcy, you will receive numerous offers from car dealerships in the metro Detroit area with offers to purchase vehicles through their lots. Be sure to shop for the best interest rates and financing terms available.
However, your ability to do so will depend upon a variety of personal financial circumstances that will vary from case to case. In addition, the quality of car you are able to purchase will vary depending upon your overall picture.
In other words, if you are unable to buy a car after bankruptcy, the bankruptcy itself may be part of the reason why—but it will not be the only reason why.
Bankruptcy is what is known as a negative credit reporting event. It’s not a good thing to have on your credit report at the time you are applying for financing or a loan—but it is not the only negative credit reporting event that there is.
A more serious negative credit reporting event is a heavily overbalanced debt-to-income ratio.
If you are unemployed, under-employed, or, very typically, your debt-load is simply disproportionate to your income level, this is nearly always the primary reason that you are denied a loan application.
If you are suffering from the burden of overwhelming debt, neither the fear or losing a car or the fear of being unable to obtain one later should prevent you from dealing with the debt-to-income ratio before anything else.
Say what you will about the bankruptcy process: it is very good at dealing with a bad debt-to-income ratio.
First, what happened to the car? Did you have it when you filed for bankruptcy? Are you surrendering it? Or was it repossessed prior to filing?
If you had it when you filed, did you reaffirm the vehicle during your bankruptcy?
NO CAR AFTER BANKRUPTCY: WHY?
In other words, you might have a variety of reasons for needing to own a car after bankruptcy. The means by which you disposed of the old one prior or during your Chapter 7 or Chapter 13 bankruptcy process can affect the ease with which you purchase another one later.
If you owned your vehicle “free and clear” and it simply died of natural causes, this, obviously, does not positively or negatively affect your chances of buying a new car after your bankruptcy discharge (or during the bankruptcy, in a Chapter 13 process).
If you missed payments on your vehicle loan or had it repossessed prior to the filing of your Chapter 7 or Chapter 13 bankruptcy, the bankruptcy itself will not exacerbate the negative credit impact of those missed payments. It is what it is, in other words.
The bankruptcy will, however, “stop the bleeding” in terms of any remaining balance owed on the car loan. If your vehicle was repossessed and auctioned off by the lender for less than you owed, you will still owe, under Michigan law, what is called a “deficiency debt.” This is the difference between the amount for which the car was auctioned and your loan balance.
Thus, if you owed $15,000 on your car loan when the vehicle was repossessed and it was then auctioned off for $5,000, you will still owe your lender (or whatever debt-buyer it sells the note to) $10,000—plus any fees, interest, or collection attorney’s fees to the extent permitted by state law.
Your bankruptcy discharge will get rid of that deficiency balance—and any future negative credit reporting that it presents.
Likewise, if you surrendered your car during your bankruptcy after missing payments, your obligation to pay the balance of your car loan will be discharged in bankruptcy.
This means that, at some point after your Chapter 7 or Chapter 13 discharge is issued, the account be listed as “CLOSED: DISCHARGED IN BANKRUPTCY” (or some iteration thereof).
The loan itself, along with any missed pre-bankruptcy payments, will continue to reside there until the loan hits the 7-year mark as defined by the Fair Credit Reporting Act. Then, it will disappear from the credit report entirely.
If you did not miss any payments prior to surrendering the car during your bankruptcy process, there will be no missed payments reported. Only the “CLOSED: DISCHARGED IN BANKRUPTCY” notation.
If you reaffirm your vehicle loan during a Chapter 7 bankruptcy (or retain your vehicle in a Chapter 13 bankruptcy), you will hopefully have kept your payments current and paid-in-full when you begin your search for a new, post-bankruptcy vehicle.
Reaffirmation, to refresh, is a process available in a Chapter 7 by way of which one signs a separate contract with the vehicle loan lender agreeing that the loan is excepted from the bankruptcy discharge. It puts you back on the hook for the obligation to make those car payments.
Why you would reaffirm and, more commonly, why you wouldn’t is a subject that has been addressed elsewhere on this blog.
For present purposes, it is sufficient to note that creditors’ bankruptcy attorneys will always claim that signing a reaffirming agreement will “help” your credit score and “allow” creditors to further report positive, timely vehicle payments to your credit bureaus.
This is a true in a sense, but it is never a reason to re-obligate yourself to, say, a high-interest, subprime vehicle loan that you couldn’t afford in the first place, likely because of depressed income or the rest of the debt you may have been carrying prior to the bankruptcy.
It is just as true that discharging the rest of your debt will make the purchase of a vehicle more affordable. Dumping the high-interest loan you “had” to take prior to the Chapter 7 may make that easier for you.
The question will really be what your credit report looks like immediately after your bankruptcy discharge and what it will look like even just a little while later.
CREDIT REPORTS AFTER BANKRUPTCY AND CAR LOANS
It is worth noting that your credit reports provide the source material for the mathematics involved in the computation of your credit score, but they are still two different things.
Your credit reports are simply a history of your credit activity that may be more or less accurate. It is up to you to police your credit reports to ensure that the reporting of your creditors is correct. If not, you must dispute that information.
Your credit score results from the information on your credit report. It is the result of a confidential, trade secreted formula developed by a private corporation, the Fair Isaac Corporation (thus, “FICO”).
Your credit score will vary from credit bureau to credit bureau because the information reported to each bureau by each creditor is less than consistent.
Your credit score is not a barometer of whether you are a good or bad person. It is simply a number that lenders use when deciding to lend money to you. They are not required to use it. They simply choose to. They have been socialized into using it by Fair Isaac and the credit bureaus, who sell access to that number.
That all said, the credit score relies upon two primary ingredients: your debt-to-income ratio and the amount of “available credit” that you have.
After your bankruptcy, you will have almost no “available credit” because nearly all of your open lines of credit will be discharged and/or closed. You won’t have that open $20,000 line of credit any longer.
This is the primary source of the “hit” that bankruptcy filing deals to your credit score.
On the other hand, the bankruptcy discharge closes all of those “open and bleeding” negative-reporting accounts. Your debt balance (except for non-dischargeable debts) is reduced to zero.
Thus, your debt-to-income ratio is typically drastically improved by a bankruptcy discharge.
The only thing really sandbagging your new car loan is that the bankruptcy filing itself will remain in the “public records” section of the report for 10 years from the date of filing a Chapter 7 bankruptcy (7 years for a Chapter 13 filing) and that those pre-bankruptcy missed car and other missed or late installment payments will still sit there as well for a few years.
Time is the ultimate cure for better credit, in other words.
TIMING OF YOUR NEW CAR PURCHASE AFTER BANKRUPTCY
That being the case, the longer you can put off buying a new car after your bankruptcy, the better your odds of obtaining a loan with a favorable interest rate will be.
If you did reaffirm your vehicle, your lender may or may not be reporting your timely loan payments to your credit bureaus. They are not required to do so, no matter what their harried attorney told you when enticing you to sign your reaffirmation agreement (likely against your own bankruptcy attorney’s advice). If they are not, you can provide evidence of your timely payments yourself to the bureaus to correct that misinformation.
If you make those payments and they are positively reported, you can sooner than later, depending on your loan balance, pay it off (or not) and trade it in for a new vehicle.
Otherwise, if you are car-free upon bankruptcy discharge, let time do its work and erase some of that old negative reporting from your reports.
Maintaining stable employment throughout this period is often helpful. A new line of credit (moderately sized) carefully and religiously paid each month will help to put new positive reporting onto your reports.
If, as is often the case in Metro Detroit, you need a vehicle immediately, do your shopping carefully. Don’t accept the first car loan to be offered to you, especially from a certain subprime lender headquartered on Telegraph Road and 10 Mile in Southfield.
It will happen for you.
BUYING A CAR AFTER BANKRUPTCY: THE BOTTOM LINE
The bottom line is that you can buy a car after bankruptcy. Fear of not being able to purchase a vehicle is never a reason to relieve yourself of burdensome debt. If you are totally unemployed and have no or very little income, a bankruptcy will not make you more ineligible for a car loan than you already are.
If you have questions about Chapter 7 or Chapter 13 bankruptcy but are concerned about your transportation needs, contact us to schedule a free consultation. We maintain easy-to-access offices in Detroit and Royal Oak.