Can I Buy a Car After Bankruptcy?

Buying a car is possible after declaring bankruptcy and car loans can help you rebuild your credit more quickly as long as you can handle the payments. While initial interest rates on car loans will be high in the months after filing a bankruptcy, buying a car is still achievable. When you fill out an car loan application, you will be given the opportunity to explain your bankruptcy and current financial situation.

You may be surprised to learn that many car dealers and lenders actively solicit the business of people who have just emerged from bankruptcy.  From their standpoint, marketing to such customers represents a calculated risk.  Although they know that you have just filed for bankruptcy, they also know that you now have the benefit of a fresh start with no or low debt levels and payments.  They also know that you will not be able to obtain the relief offered by our bankruptcy laws again for a period of time.  Thus, these businesses feel like individuals and families coming out of bankruptcy represent a good marketing opportunity.

Things to keep in mind when buying a car after bankruptcy:

1. Make a budget beforehand.  The information listed on your Schedules I & J of your bankruptcy petition would be a good place to start.  Decide what payment amount you can safely afford.
2. Explain your situation and what led to the bankruptcy.  Explain how you will better be able to afford a car loan payment after bankruptcy that before bankruptcy.
3. Shop multiple car dealers.  You may find some more willing to work with you (and grant you better interest rates) than others.  In any event, the interest rate you will be charged after bankruptcy will be higher than “prime” rates. 
4. It is best to get an car loan with a lender who will report your payment history to the credit bureaus each month.  Some small, “buy here-pay here” dealers don’t report to the credit bureaus.  Having positive tradelines on your credit is the fundamental step in repairing and improving your credit after bankruptcy.  Ask the lender whether they report customers’ payment histories.
5. If you are unable to obtain an car loan in your sole name, consider asking a friend or family member co-sign or guarantee your loan.  Don’t just have them get the loan in their name.  Have them co-sign or guarantee your loan.  In that case, you will have a positive tradeline on your credit report (if you borrow from a lender who reports).  I have recently had a client who obtained a car loan just months after their bankruptcy discharge with a 6.5% interest rate.  They were able to do that by having a family member co-sign the loan application.  In doing so, they accomplished several goals such as: A) getting a car, B) obtaining a good interest rate and C) beginning to rebuild their credit with the tradeline from the new loan.