Wheels are essential for most of us to get to work.
And whatever you’re driving when you file bankruptcy will need to be replaced at some point.
So, how are you going to finance that next car if you’ve just filed bankruptcy and face 7-10 years with the bankruptcy on your credit report?
The credit industry tries to fan that worry; after all, they want you to keep paying on impossible debt rather than get a fresh start.
They want you to believe that no credit is available for eons to those who have filed bankruptcy.
Hogwash.
Bankruptcy improves your credit score
Under the credit scoring system used by Fair Isaacs, your credit score improves after bankruptcy. Upon entry of the discharge, your debt to income ratio improves dramatically.
When you sit down to pay your bills after bankruptcy, there are fewer creditors clamoring for a piece of your paycheck.
Now, granted, that’s just one element of the score. But it makes the point that credit scores are not all about whether you paid your bills as agreed.
The negative impact of a bankruptcy fades over time, time that is far shorter than the 10 years that it may appear on your credit record.
People in bankruptcy get car loans
The most compelling evidence that credit for a car is available after bankruptcy is the fact that many debtors currently in Chapter 13 get loans to replace old cars. They haven’t even gotten the discharge of their debts yet.
They pay a significantly higher interest rate for loans during bankruptcy.
But they are living proof that car loans are available.
The take away? Bankruptcy affects the price you pay for credit but doesn’t usually bar you from credit.
Consider getting a replacement car before bankruptcy
I often send clients planning on filing bankruptcy who are driving cars on their last legs out to shop for a new car.
And lots of them report back that they got a loan even with all the nasty debt still on their credit report.
The auto industry can be counted on to see that you can get a loan to buy their product!
My only admonition to them is to tell the truth on the loan application. To do otherwise creates problems far bigger than an unreliable car.
If you get a car loan on the eve of bankruptcy, you are also signing up to keep paying that loan through and after the bankruptcy.
Join a credit union
Credit unions are different than banks in lots of ways, but the most important one is that they are in business to make loans to their members.
Become a member.
Do your banking at the credit union.
Start creating a solid, post bankruptcy credit. If your present car is paid off, start making a monthly “payment” to your “replace the car” fund.
After all, you don’t have to finance all of the purchase price of the car. Be ready to make a meaningful downpayment, making the size of the loan you need smaller.
Your budget will appreciate a smaller monthly car payment when the time comes to get a new car.
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