Car Financing While in Chapter 13 Bankruptcy Filing
When you file for Chapter 13 bankruptcy, a form of repayment bankruptcy known as a reorganization, your credit score will be negatively impacted, and this information will remain on your credit report for seven years. In a Chapter 13 bankruptcy, you adhere to a court-approved repayment plan that spans three to five years, during which you cannot incur new debt.
However, the court understands that unexpected circumstances can arise, including purchasing a vehicle before completing the Chapter 13 repayment plan you file. If you have the funds to buy a car outright, you can do so without involving the court. In this case, you might need to update your bankruptcy schedule, a process best handled with guidance from your attorney. This option allows you to obtain a car despite being under a Chapter 13 repayment plan.
Car Loans and Chapter 13
Chapter 13 bankruptcy involves a repayment plan lasting three and a half years up to 5 years. In contrast, Chapter 7 erases debt (a discharge) in approximately four months but impacts your credit for ten years. During Chapter 13, you can explore new debt opportunities, unlike in Chapter 7.
In Chapter 7 or 13, an automatic stay stops collection attempts, allowing you time to manage your property and finances. In Chapter 13, your bankruptcy attorney creates a repayment plan, enabling you to catch up on missed payments or adjust your car loan by reducing the interest rate or if your car’s value is less than what you owe. If the car loan is older than two and half years old, then you can seek a cramdown, which allows you to repay the car loan balance based on the car’s value and not the outstanding balance when the case was filed.
How Chapter 13 Benefits You and Your Vehicle
Chapter 13 hits the pause button on those pesky debt collectors, giving you breathing room to sort out your finances. A Chapter 13 plan is filed within 14 days of the case being filed. You can use this plan to catch up on missed car payments or adjust the interest rate on your loan.
Now, let’s talk about the perks of Chapter 13 when it comes to paying back to cars:
Stopping Repossession
Once you dive into Chapter 13, this magical thing called an “automatic stay” kicks in. It’s like a shield that stops creditors from snatching away your car or other property, even if they tried before you filed for bankruptcy.
Catching Up on Your Monthly Payment
Chapter 13 lets you play catch-up. You can include those missed payments in your repayment plan. Keep up with regular payments, and your car stays right where it belongs – with you.
Reducing Car Loan
If your car isn’t worth as much as you owe, Chapter 13 can rescue you. It might shrink your loan to match your car’s value, leaving the extra debt unsecured. Again, this can only be accomplished if your car loan is over 2.5 years old.
Need another car while you’re in Chapter 13? No worries! You can work with a unique lender through a dealership. Once you get the green light, the bankruptcy court gives you the thumbs-up with an “Order to Incur Debt.” That means you can go ahead and get your new wheels! You only need the bankruptcy court’s permission to incur new debt if the loan exceeds $2,000.00.
Getting a New Car in Chapter 13: Step-by-Step Guide
If you need a new car while going through Chapter 13 bankruptcy, don’t worry – there’s a way to make it happen. Working with subprime lenders through particular finance dealerships, you can secure an auto loan and drive away in your new vehicle.
Here’s how to navigate the process smoothly:
Create a Budget For Your Car Loan Payments
First things first, assess your finances. Ensure you can comfortably handle the cost of the used vehicle, complete payment plan, new car payment, and your existing debt repayments. If necessary, collaborate with your attorney to tweak your repayment plan.
Shop Around for a Car in Your Budget
Explore cars that fit your financial limits. Look for car options that align with what you can comfortably afford in your current vehicle, including the monthly payment and other related expenses.
Find a Lender
Look for lenders who specialize in assisting individuals in active bankruptcy. Be prepared for higher interest rates and rates due to your income and lower credit score. Your bankruptcy attorney or local credit union can guide you to lenders willing to work with your situation.
Make a Down Payment
Save up for a down payment. A larger down payment can reduce the money you need to borrow, and the loan amount might improve your chances of approval.
File a Motion
Prepare a motion explaining the necessity of a vehicle loan for the new car and the financing plan payment amount required. Your attorney will assist you in filing this motion with the court. It’s a crucial step in gaining approval for the car loan. Some bankruptcy courts will allow the Debtor to avoid a motion and simply agree with the Trustee for the loan through a stipulation to incur debt.
Complete the Purchase
Once the court approves, you’re all set to finalize the purchase. Keep up with your loan payments, ensuring they align with your income and financial obligations. With the court’s consent, due diligence, and careful financial planning, you’ll soon be behind the wheel of your new car, moving forward with confidence.
Challenges to Getting a Car During Bankruptcy Chapter 13
Navigating the process of obtaining a car loan during Chapter 13 bankruptcy involves several crucial steps, each demanding meticulous attention.
Initial Dealership Visit: Commence your journey by visiting a dealership. Explore the range of vehicles that align with your needs and financial capacity.
Transparency with Salesman: Honesty is paramount. Candidly inform the car salesman about your Chapter 13 bankruptcy status. The lender will inevitably discover this information when scrutinizing your credit report.
Essential Information: Provide the salesman with the hypothetical monthly payment, interest rate, and the total amount you intend to pay or borrow. This information is the foundation for the court motion I must file as your legal representative.
Court Motion Filing: Expect a meticulous process. The court motion filing involves a comprehensive compilation of your financial details. Understand that this procedure, including the necessary court hearings, typically spans 2 to 5 weeks. However, expedited “emergency” hearings can be arranged within 2 to 3 weeks in emergencies such as a recently totaled car.
Judicial Approval: Unless there are compelling reasons, such as severe delinquency in your existing plan payments or an unwarranted pursuit of an excessively costly vehicle, the judge overseeing your case will likely approve your loan request.
Finalizing the Purchase: Once the Judge signs the Order of Court approving your loan, you can complete the purchase. However, adhere to the local regulations within your Bankruptcy District.
Please be aware that this arrangement necessitates patience, as creditors may have to wait approximately three months or less than five years before receiving payments. It’s essential to understand and comply with your Local Rule unless a waiver from your Judge is obtained, making it imperative to channel your car loan through your new Chapter 13 plan.
These steps require precision and adherence to the legal framework, ensuring a smooth and compliant process within the intricate landscape of Chapter 13 bankruptcy. A bankruptcy lawyer can guide you through this journey, offering expertise and support at every crucial juncture.
Bankruptcy Tip
Post-bankruptcy, improving your credit score is vital for future financial stability. Consider obtaining a secured credit card and monitor your credit regularly. Set a budget for car-related expenses, including gas and insurance. A larger down payment can improve your approval chances.
Exploring Options Instead of Applying for a New Car Loan
If securing a car loan proves challenging, consider these alternatives:
Wait and Rebuild the Credit
Delay car purchases until your credit improves, leading to better loan terms.
Pay in Cash
Save and pay for the car in cash to avoid the cost of taking out a loan from a car lender entirely.
In summary, Chapter 13 bankruptcy provides vital tools for managing car loans. The automatic stay offers a crucial pause on repossession attempts, allowing time to stabilize finances. Returning the car or adjusting payments helps ease the debt burden.
While securing a new car loan in Chapter 13 requires careful planning, it’s possible with a budget, suitable lenders, and a down payment. Alternatively, waiting to rebuild credit or paying in cash are viable options if loan approval proves challenging.
Chapter 13 offers a pathway to financial recovery, empowering individuals to regain control over their car loans and pave the way for a stable future.
