Often times, our clients are very concerned about how bankruptcy will affect their ability to purchase a car either after a Chapter 7 case or during a Chapter 13 case (generally when their current car “dies” on them). Chapter 7 is the simpler, easier proposition. A Chapter 7 case typically takes about 90 days from start to finish. Once the case is finished, our client is free to purchase a car on credit without seeking permission from the bankruptcy court.
Really, the only “trick” is to be very, very cautious about purchasing a car right after completing a bankruptcy. There is no shortage of lenders and car lots willing to finance a person who just finished a Chapter 7 bankruptcy – in many ways a person just finishing a bankruptcy is actually a better credit risk than a person who hasn’t filed bankruptcy. If you think about it, the person who just finished the Chapter 7 case cannot file another Chapter 7 case for 8 years, plus that person just got rid of most or all of their other debt. A person who has not filed Chapter 7 bankruptcy remains eligible to file a Chapter 7 bankruptcy to wipe out a car loan debt plus that person may have other debt obligations that will limit them from paying on the car loan. So, to lenders, a freshly completed Chapter 7 case can be a positive.
I have had car dealers actually send people to me so that I can do a bankruptcy to clean up their credit report, thereby making them eligible for a car loan when before the bankruptcy they would not qualify for the car loan. But, you must be very wary of the terms of the car purchase. You have to understand that the lenders who want your post-bankruptcy business are all “second chance” financiers. They will take on some risk, but they want reward in exchange (and A LOT of it). I have had clients come back to me after a bankruptcy to ask my advice about a car purchase and to review the loan documents. Some aren’t too bad, but others make me wonder how the car dealer sleeps at night. I have seen proposals that have the client purchasing what is really a $5,000 car but with a sale price of $10,000. And, the client has to make a $2,000 down payment upfront. Then, there are a bunch of “junk” fees like a loan origination fee, a document fee, a handling fee and the good old add-ons like rustproofing and an aftermarket warranty that really doesn’t provide much coverage (maybe just covers the engine & transmission only). Those junk fees can add thousands back onto the loan amount. So, the $10,000 purchase price with a $2,000 down payment could easily end up with a loan amount of $11,000 if the junk fees are $3,000 (which believe it or not, is pretty typical). That $11,000 loan then gets financed at an outrageous interest rate, generally between 18% on the low side to as much as 30%. This is how the “buy here, pay here” car dealers can afford to “finance everybody – no one refused credit.” Heck, I’d make a loan where I provide a $5,000 car if you give me $2,000 cash plus promise to pay me $11,000 with 30% interest. You only have to have one in three of those things pay off to make a really nice profit.
This may surprise you, but I feel that the new car or “franchised” car dealers provide the best chance to get a reasonable deal on a car loan if you have bad credit. The reason is because new car dealers are considered more stable and therefore less risky than just a used car dealer. The new car dealers are constantly being audited and monitored by the factories and factory finance companies, so there is less chance of “shenanigans”. So, more banks and non-factory finance companies are willing to offer financing through the new car dealers than will work with a used car lot. More lenders competing for your (the buyer) business means a better chance at getting a fair deal.
When a client who is in the middle of a Chapter 13 case has a car either get wrecked or completely break down (past the point of reasonable repair), the problem is a little tougher. There are few lenders willing to provide a car loan to someone in the midst of a Chapter 13 bankruptcy, mainly because the lender doesn’t know if the Chapter 13 case will complete successfully. The case could convert to Chapter 7 and the client could wipe out the new car loan when the case is converted. The Chapter 13 case could get dismissed, which also means that the new car loan is subject to being discharged in a case that can be filed immediately after dismissal of the old case. Generally, to get a car loan in the middle of a Chapter 13 case, you will need a co-signer with good credit – generally a family member. The good news is that if you have a co-signer with good credit, your loan may be a much better deal than trying to get a loan on your own after a Chapter 7 case. You are in essence using that co-signer’s good credit to get a loan. Another option is simply to have the co-signer buy the car on his or her own, without putting your name on the car or the loan. You then make the payments yourself directly to the car lender and once all of the payments are made, the “co-signer” signs the car over to you (with the Court’s approval of this arrangement, of course). However, there are some additional risks to the “co-signer” in this arrangement and getting insurance can be more challenging.
At WM Law, we have several car dealers that we are comfortable with referring you to for a car purchase. We’ve worked with these dealers and know them to be fair to our clients. In fact, some of them have been previous clients of our firm and know exactly what you are going through. So, if the prospect of having to replace a car shortly after filing a bankruptcy is keeping you from filing, just know that there options. It’s important to be smart about your car deal and having a co-signer with good credit is always a plus. But, many people successfully complete reasonable car purchasers even with a bankruptcy on their credit.
By Jeff Wagoner, W M Law President
