For many Americans, owning a car is a necessity. So, when considering filing for bankruptcy due to financial hardships, it is only fitting to worry about whether this action might prevent you from purchasing a vehicle. The good news is that bankruptcy does not necessarily mean you will never own a car again.
Financial responsibility post-bankruptcy improves car loan chances
The process might be different for purchasing vehicles post-bankruptcy, but it is possible. Here are some factors to consider:
- Credit score impact: Bankruptcy can significantly lower your credit score, typically by 100-200 points. This can make obtaining credit or loans at favorable interest rates more difficult.
- Loan approval: You may need to provide additional documentation or explanations to lenders when applying for a car loan.
- Higher interest rates: Lenders may offer less favorable loan terms due to your bankruptcy history.
- Chapter 7 bankruptcy versus Chapter 13 bankruptcy: The type of bankruptcy you file affects your car-buying timeline.
Your ability to repurchase a car depends on whether you need a loan. If so, you must prioritize rebuilding your credit score. When you apply for a car loan, lenders will look at your income, employment status and post-bankruptcy credit behavior.
You can start restoring your credit right after the discharge of your unsecured debts in Chapter 7 bankruptcy. This bankruptcy filing often lasts three to six months.
Chapter 7 bankruptcy permits you to exempt or protect up to $4,000 in equity in one motor vehicle. This means you can keep a car worth up to this amount. You might need to pay the difference or lose the asset if your vehicle is worth more.
For Chapter 13 bankruptcy, you may be able to purchase a car while repaying your debts as long as the court approves. This chapter often takes three to five years. If you make the payments, your repayment plan may include your car loan during this period.
Intricate process requires personalized guidance
The goal of bankruptcy is to help you restart your financial life, not to keep you in debt forever. With the right help and legal advice, you can rebuild your credit and eventually purchase a car on favorable terms. Do not let fear of the unknown stop you from exploring your options.