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How Long After Bankruptcy Can I Buy a Car?

By Melissa Spicer | July 27, 2022

Once the smoke settles after bankruptcy, you may find yourself wondering whether it is possible to purchase a car.

The truth is that you likely won’t be able to purchase a new car right away unless you pay cash, but you’re certainly not going to need to wait seven to 10 years (the length of time it takes for the bankruptcy to fall off your credit record) to find financing either.

In fact, for most buyers, the debts discharged in bankruptcy provide enough financial relief that they are better able to come up with cash to buy an affordable used car or at least find themselves able to keep up with car loan payments.

However, getting a car loan after bankruptcy is still subject to the blemish that bankruptcy leaves on your credit record. Because of this, you’ll pay a penalty for the privilege of buying a car by way of increased interest rates. This is the hedge that auto financers use to reduce the risks of doing business with a consumer post-bankruptcy. After all, bankruptcy—no matter the cause—demonstrates the borrower’s willingness to walk away from their debts. Collecting more interest provides a buffer against this risk.

How Long Should You Wait to Buy a Car After Filing Bankruptcy?

Filing bankruptcy—also useful for getting a handle on debt—can have lasting repercussions for the filer. However, even though the effects of bankruptcy filing can stain your credit record for up to a decade, the truth is that you don’t need to wait that long to take out a car loan. With each passing month post-bankruptcy, the impact of the bankruptcy on your credit decreases. With six months of a bankruptcy’s discharge, it is altogether possible to get a loan for a car.

Still, just because you could get a loan doesn’t mean you should get a loan. Waiting longer to get financing for a vehicle once your bankruptcy has cleared the bankruptcy courts means giving yourself time to improve your credit ranking. In turn, this increases your chances of getting approved for the car loan you want at a rate of interest that’s acceptable and affordable to you. The more favorable your loan's terms, the higher the likelihood that you will be successful in paying off your car loan and building strong credit in the process.

A better option might be (if you have the cash to do so) buying a cheap car to get you through the next six months to a year. Although the car you can afford to buy in cash might not be one that you’re proud to say you own, going for a cheap car right now gives you more time to patch your credit up and save for a larger down payment on the wheels you really want. Both actions—having a better credit score when asking for a loan and being able to pay more down on the car you want—can make a huge difference in the amount of interest you’ll be charged. Once a year passes, you’ll be better prepared to afford a car purchase than you were just a few months out from your bankruptcy.

Car Loans Post Chapter 7 Bankruptcy

How long you must wait the following bankruptcy to get a car loan depends largely on the type of bankruptcy proceeding you are involved with. If your bankruptcy was a chapter 7 action, then the typical process requires from four to six months from start to finish. Once the 341 meeting of creditors is held, then you should receive notice that the bankruptcy was discharged around 90 days or so later. Still, even after getting this notice, you can improve your odds of getting a better rate on a car loan (which can save you oodles of cash over the life of the loan) by waiting a bit and improving your credit situation.

Car Loans During or After Chapter 13 Bankruptcy

If you are in the midst of a chapter 13 bankruptcy, then the process of buying a car is a bit different. In stark contrast to chapter 7 bankruptcies, chapter 13 bankruptcy involves reorganizing debt and giving the debtor time to get caught up on their obligations. You can buy a car and get a car loan during the chapter 13 process, but it requires special permission from the bankruptcy court or the bankruptcy trustee. Check with your bankruptcy attorney for advice on auto loans during chapter 13 bankruptcy.

Once you are discharged from your chapter 13 bankruptcy, you are free to purchase a car or take out a car loan without asking the court for permission. And just as with chapter 7 bankruptcies, the standard recommendation for getting a car loan is the same. Give yourself time to improve your credit, since putting off the purchase until your credit is stronger can result in reduced rates of interest and substantial savings on the total price of the car you want.

Improving Your Post-Bankruptcy Credit

Prior to applying for auto financing after bankruptcy, bumping your credit score requires a little elbow grease. You have to be proactive if you want to make an impact on your credit and overcome the stigma of bankruptcy.

Some options to consider:

  • Check your credit reports for accuracy. All three of the major credit bureaus each have a different accounting of your credit performance. It’s never safe to assume that just because one has indicated that your bankruptcy is discharged that the other two are up to speed. Check all three—Experian, Transunion, and Equifax—to see if there are any errors that need to be corrected prior to asking for financing. File a dispute for any item that is erroneous or inaccurate.

  • Get a secured credit card or two to help build your credit history and showcase your ability to handle credit. These cards require that you make a deposit equal to the amount of credit you wish to have. For example, if you want $5,000 in credit, you need to deposit $5,000 in cash.

  • Follow the general rule of running a small balance on the cards you get. For instance, if your credit limit is $1,000, then never exceed your limit and always pay off everything you owe each month—on time—with the exception of one-third of the available credit line. For a card with a limit of $1,000, you should run a balance of roughly $333 each month. This shows that you can manage your finances.
    Avoid applying for credit that you likely won’t be approved for. Every credit inquiry dings your report.

Finding Financing After Bankruptcy

Getting a car loan after bankruptcy can be difficult, especially if you don’t take an adequate amount of time to improve your credit situation and save for a down payment.

Some options to consider:

  • A bank or credit union where you already do business. Financial institutions sometimes treat their existing customers more favorably as opposed to a customer walking in the door who has no prior connections to the lender.

  • A bad credit auto lender. There are companies that specialize in writing loans for consumers who have bad credit—including those who have had their debts discharged in bankruptcy. These lenders are known as subprime lenders, and the loans they write are subprime loans. Don’t plan on getting a good interest rate, but if the terms are suitable for your particular objectives, then approval rates are higher with this type of lender than a conventional lender. In some cases, you may be able to lower your interest rates with a bad credit auto loan company by applying alongside a cosigner who has good or excellent credit history.

  • Another consumer’s auto loan (swap lease). It may be possible for you to take over someone else’s lease on a car that you want. This is known as swap leasing, and although it has some pitfalls and disadvantages to consider, it can be a viable solution for some post-bankruptcy borrowers and current leaseholders. For the original signer of the lease, swap leasing lets them get out of a loan they no longer want to be in. For the bad credit borrower, swap leasing may help them get a car they want for less, and at more favorable terms.

  • Buy-here-pay-here car dealerships. As a last resort, buy-here-pay-here car lots provide on-the-spot financing, usually with a down payment of around one-fourth the total cost of the car. These car lots do not base your ability to get a loan on your credit score, but you will need to prove that you work, how much you make, and where you live. You may also need to provide personal references for the auto dealer to contact to prove that you are who you say you are.

Tips for Choosing and Buying a Vehicle After Bankruptcy

Once you have decided to purchase a vehicle after bankruptcy discharge (or during your chapter 13 bankruptcy, if you gain permission), there are some tips that can make things go more smoothly.

Choose a vehicle that meets your needs and fits your budget. To avoid future repossessions and negative consequences, it's important that you stay on track with what you can actually afford when you choose the vehicle you buy post-bankruptcy.

Put your dream car on the back burner, at least for now. This is not the time to go all out and make a splurge on the car you’ve been dreaming of your whole life. You’re just now getting your financial house in order. Consider your budget more than your ego until you and your credit report are in better financial health.
Understand how much car you can afford. Assess your budget and be sure to add in expenses that owning a car will create, including insurance, registration, taxes, and maintenance costs.

Try for a fixed-rate loan, not an adjustable-rate loan. A fixed-rate loan may cost more at the onset of the loan, but at least it’s a predictable loan with a set payment. An adjustable-rate loan fluctuates after an initial period of time, which makes it hard to budget for your payment. Avoid loans that are “adjustable,” “conditional” or “contingent.”

Avoid loans that require you to make payments for longer than 5 years. While it can make your loan payments less each month to stretch them out over more years, it can also make the car cost more overall because you’ll be paying more interest. If possible, keep your loan to less than 5 years.

Apply with a cosigner if you can. A cosigner, such as a family member, with a favorable credit history or good credit, can be beneficial to helping you get a car loan—or even get a car loan with a better interest rate and loan terms than you’d enjoy applying alone. Be sure, however, that the cosigner is willing to stand good for the loan if you get behind on your monthly payments because the lender will expect them to.

Look for hidden fees and add-on charges. Although it seems predatory in practice, car dealers and finance companies tend to tack on even more hidden fees than usual for bad credit buyers. Be sure you check thoroughly and reject any fee that you don’t think is fair.

The Bottom Line

Car buying after chapter 7 and chapter 13 bankruptcy discharge can be complicated. The bottom line is that it is possible to get new credit to buy a car following bankruptcy, but whether you pay a higher interest rate or a lower interest rate depends on how long you wait and the moves you make to improve your credit in the interim.

Although everyone's financial situation is different, taking on new debt following bankruptcy should be done with caution. When it comes to buying a car after bankruptcy, buying a good used vehicle may be a better (and more affordable) idea for post-bankruptcy borrowers who want to really take the opportunity bankruptcy affords to rebuild their credit stronger than ever before. With every on-time payment, you move closer toward the financial freedom that excellent credit can bring.