Can I Get a Car Loan After Bankruptcy?

Bankruptcy is generally a last resort, and it’s not the right choice for everyone. But if you’re in too much debt to reasonably pay off, declaring bankruptcy can be the best way forward. Bankruptcy can help you get rid of debt, but it also makes it difficult to get a credit card, a loan, or any other type of credit. 

Most people don’t have enough savings to pay for a car entirely in cash. Without a car, though, it can be hard to get around or even to keep your job. Whether you’ve just declared bankruptcy or are considering it, you may want to know whether you can get a car loan after bankruptcy.

Can you get a car loan after bankruptcy?

It’s entirely possible. Typically, it’s easier to get a car loan after bankruptcy than a personal loan. That’s because a car loan is secured by collateral: If you don’t pay, the lender can repossess the car and recover their money that way.

However, many lenders won’t be willing to work with you, and the ones that do will probably charge high interest rates.

How bankruptcy affects your ability to get an auto loan

After you declare bankruptcy, you’ll have some trouble securing credit, including car loans. However, the exact impact on your creditworthiness will depend on the type of bankruptcy you declare:

• Chapter 7 Bankruptcy: Discharges most unsecured debts but may involve seizure and sale of assets
• Chapter 13 Bankruptcy: Restructures your debts but allows you to keep your assets

Here’s a closer look at how each type of bankruptcy may impact your ability to get a car loan.

Chapter 7 bankruptcy

People who declare Chapter 7 bankruptcy tend to have little income and few assets. Most unsecured debts are discharged, so Chapter 7 bankruptcy can be a way to get a financial clean slate.

Declaring Chapter 7 bankruptcy can lower your credit score by 100 points or more, so once your debts have been discharged and the bankruptcy process is complete, your credit might be at an all-time low. 

You could probably get approved for a car loan at this point. But you’d likely only be approved for one with a high interest rate, high fees, or both. Many dedicate some time to rebuilding their credit scores before taking out a post-bankruptcy car loan.

Chapter 13 bankruptcy

Chapter 13 bankruptcy is sometimes called a “wage earner’s plan” because it requires you to pay toward your debts. Depending on your circumstances, you might make payments toward your debts for either three years or five years. After the repayment period, any remaining debt is discharged.

Once you’ve completed your repayment plan, getting a car loan should be relatively simple (although you might want to wait until you’ve improved your credit score). However, if you need to buy a car during the three- to five-year repayment period, securing a car loan can be more complicated. 

Why? Because you’re paying toward debt you couldn’t afford to pay back in full, you generally need the court’s permission to take on new debt during bankruptcy. Usually, the court will only approve your request if it’s for something essential.

For example, if your current car has completely broken down and you need to buy another to get to work, the court might approve the additional debt. However, if you want to upgrade your functioning car to a better one, the court is likely to deny your request.

Whatever you do, don’t just take out a car loan and hope the court doesn’t notice. If you do this, your bankruptcy case might be terminated.

How to get a car loan after bankruptcy

Getting approved for a car loan after bankruptcy is possible, but it might not be easy. These tips may improve your chances of getting approved:

• Ask a family member or close friend if they would be willing to co-sign the loan
• Save money for a larger down payment before buying
• Check with credit unions or lenders that focus on people with lower credit scores
• Choose a more affordable vehicle

Always look closely at interest rates and loan terms. Some lenders prey on people with lower credit scores by charging outrageous interest rates. This is especially common with buy-here-pay-here car dealerships.

Many financial experts suggest waiting at least a few months after bankruptcy to buy a car. The more time you have to improve your credit score, the better the interest rate you’ll likely receive.

How to rebuild your credit after bankruptcy

Seeing your credit score drop after bankruptcy can be discouraging. But the good news is that you can rebuild it from there!

After you declare bankruptcy, you should work on establishing a positive credit history. Your payment history is the most significant factor influencing your credit score, so making all payments on time and in full will help boost your score.

If you don’t have an existing credit account, consider applying for a secured credit card or another product designed specifically for those with poor credit or limited credit history. Use the account to purchase a few things each month and then pay the statement balance in full.

You can also ask a trusted friend or family member with good credit to add you as an authorized user to one of their credit cards. When you do this, their positive payment history is added to your credit report, too.

Credit-builder apps can connect you with credit-building tools while offering you financial guidance. Kikoff is one of those apps. We don’t check your credit when you sign up, and if you’re approved, you’ll gain access to a credit line you can use to buy items in our online store. As you pay off those purchases over time, we report your payments to credit bureaus.

We also offer bill negotiation tools, secured credit cards, credit-builder loans, personalized financial insights, and other tools to help you reestablish credit and build a better financial future.

Ready to start rebuilding?

Many people see bankruptcy as a death sentence for their credit. While it’s true that bankruptcy causes major credit damage, that damage isn’t permanent. When you take meaningful steps to rebuild your credit, you can increase your chances of getting a car loan after bankruptcy.

If you’re looking for support and guidance along the way, Kikoff is here to help. Signing up is free, and it takes just a few minutes. Create your account with us today!