5 Simple Steps to Get a Car Loan After You File Bankruptcy

One of the major concerns we hear from clients considering bankruptcy relate to their vehicles. Those who have a vehicle that's a recent model and in good shape worry that they might have to give it up if they file Chapter 7 (usually not). Those who have a vehicle but are behind on payments worry they may lose their car if they file bankruptcy (in Chapter 13, usually not). And those who know they'll need to buy a car in the near future but also need to file bankruptcy now worry they won't be able to get a car loan - this is not accurate. You should be able to get a car loan after bankruptcy and without waiting too long. Here are five simple steps to make sure you can buy a car when you need it.

#1 Clean up your credit report

The bankruptcy will initially cause your credit score to drop, but it should begin to recover in short order. But you need to make sure that it rebounds as fast as possible. One of the best way to do this is to ensure that your accounts are updated, and your credit report is error-free. As soon as you have your bankruptcy discharge, wait a couple of weeks then pull your free credit report.

Make sure that all of the accounts included in your bankruptcy reflect a zero balance and that they were part of your bankruptcy petition. Delinquent accounts may be listed twice – once by the original creditor and once from a collection agency. Make sure that all of the collection accounts also reflect bankruptcy. Also look for any older accounts that should have already been removed and other errors. Request any errors be corrected to optimize your score.

#2 Use a down payment or trade-in

Offering a down payment and/or trade-in reduces the amount you're financing and makes you less of a credit risk. If you have a used car, find out how much it's worth on a trade-in and then compare it to what you can get if you sell it yourself. Take the option that maximizes your financial impact. If you don't have a car to trade in, consider what other ways you can raise money for a down payment. Sell off stuff you don't need, use your income tax refund or find someone to carpool with to and from work while you save up for your down payment.

#3 Comparison shop

Start with your bank or credit union to see if you can get pre-approved. It usually works better if you can get pre-approved for a loan and then shop knowing what size loan you can get. Then you can shop for a car that fits your loan budget. Going at it from the other direction where you find a car you like and then try to get financed can see you get in over your head. That's not the best way to make the most of your financial fresh start. Used car interest rates will usually be about five points higher than those on a new car loan, but new car principal will be more. The bottom line is, no matter whether you opt for a new or used car loan - you shouldn't take on more debt than you can afford.

#4 Pay all your bills on time

To maximize your credit score and fast track improving it, you need to pay all of your bills on time after you file. And once you get a car loan, make sure you never miss a payment. Many lenders will give you a small discount on your interest rate if you sign up for auto-pay of your car note. Setting up an auto-debit for your payment is smart even if you don't save money by doing it. You'll never miss a car note, never worry that your credit score will take a hit from you missing a payment, and you'll never risk losing your car to repossession.

#5 Consider refinancing

If you consistently rebuild your credit after bankruptcy, pay your car note on time and take good care of your newly purchased vehicle, you may be able to refinance in a year or so. Once your credit score improves, you should get offers from your bank, credit union or other lenders offering you a car loan. If the rates are more favorable than what you're paying, contact the lender to discuss a refinance. Also look to your bank or credit union for refinance options. If you can get a favorable refinance deal, not only will you save on interest, but the original loan will show paid in full on your credit report that will further boost your score.