Chapter 7 bankruptcy gives debtors a fresh start and the process is fairly short. It can take as few as 3-4 months to complete a Chapter 7 bankruptcy. Once you complete the process, your debts are discharged and you are free to move on with your life, including taking on new loans.
If you are thinking about purchasing a car around the time you file for bankruptcy, here are some things you should consider
Buying a Car Before Bankruptcy
When filing for bankruptcy under this chapter, debtors will liquidate some of their assets to pay back their creditors, but they are permitted to keep certain exempted items. Georgia bankruptcy law allows debtors to keep up to $5,000 in value of a motor vehicle, as well as $1,200 in wildcard exemptions.
However, be cautious about taking on new debt immediately prior to filing for bankruptcy. Big financial decisions, such as purchasing a vehicle or even retitling it into a family member’s name, may raise red flags and invite additional scrutiny from the bankruptcy court. These might be indicative of someone trying to keep more property than they would otherwise be entitled to. You should also know that, if your car is worth more than the motor vehicle exemption, you may need to sell it and buy another, cheaper, vehicle.
If you’re considering pursuing either Chapter 7 or 13 bankruptcy in the near future, you should speak with a qualified bankruptcy attorney regarding the timing before investing in a vehicle in order to reduce the risk of being seen as a bad faith filer.
Buying a Car During Bankruptcy
Because the Chapter 7 process is so short, it is unlikely that you will be able to purchase a vehicle while your case is open.
During this time, your credit will be on hold. This prevents creditors from taking any actions to collect debt, such as making threatening phone calls or pursuing lawsuits. On the other hand, any new debt you take on during this time, such as opening a new credit card or signing a car loan, is subject to approval by the bankruptcy court. This is something that most creditors will not be willing to risk. If you can afford to wait until after your debts have been discharged, you may have better luck finding a lender.
If you are in a Chapter 13 repayment plan, you may have better luck obtaining a car loan. Because a lot can change during the three or five year repayment period, it’s slightly more common to have debtors attempt to take on a car loan while their bankruptcy case is still open. The bankruptcy court will still need to approve any new debts during your repayment period, which means that you will need to file a motion, which your creditors can object to. Be prepared for this process to take four or more weeks, and for the judge to ultimately deny your request.
Buying a Car After Bankruptcy
Once you receive your bankruptcy discharge, you can begin rebuilding your credit by taking on new loans and improving your financial situation.
However, at this point, it may be more difficult to buy a car, especially if you want to take out an auto loan. A Chapter 7 Bankruptcy will have an immediate negative effect on your credit report once the discharge is finalized. This means that you may only qualify for a high interest rate on your new car. This type of car loan, known as a “bad credit auto loan” could put you back where you were before the bankruptcy if you aren’t careful.
If you do need to purchase a car soon after your discharge, consider buying a secondhand car. Not only will a used vehicle be cheaper than a new vehicle, you may get a significantly better rate on the vehicle.
Depending on the cost of the vehicle, you may be able to buy it outright with money you keep as part of your Chapter 7 exemptions. You may decide to seek help from friends or family to get the funds, rather than taking on a new loan at an exorbitant rate.
When shopping for a new car, you should also shop around for loan rates. Often, local credit unions are able to provide significantly lower rates than other financial institutions. This is partially because credit unions, unlike car dealerships or other lenders, are not-for-profit institutions. By working with a credit union, you may be able to save a few hundred dollars through the duration of your car loan.
If you can afford to wait six months or a year after discharging your bankruptcy, you should spend time repairing your low credit score before applying for a large car loan. There are a number of small but significant actions that can help you achieve this.
For example, you could take out a secured credit card and make payments on time and in full each month to demonstrate trustworthiness and reliability. A home equity line through your local credit union, even if you don’t touch the money, will increase the amount of available credit you have. This will improve your credit score. Even making on time payments for your cell phone, television, heat, or other utilities will have a positive effect on your numbers.
If you are able to spend time improving your credit score before taking on additional debt, you may have better luck finding a reasonable car loan rate and save a significant amount of money.
Purchasing a car after your debts are discharged may also help improve your credit score because it is considered a “good debt,” similar to a home mortgage payment, due to the equity you have in the vehicle. Additionally, by paying your car loan and auto insurance each month, you will continue to demonstrate to other lenders that you are a safe bet.
This article does not contain legal advice and is for informational purposes only. In order to speak with a qualified bankruptcy attorney regarding filing for Chapter 7 or buying a car during the process, contact the Law Office of Jeffrey B. Kelly online or call us at 770-637-1598 to discuss your options for moving forward and getting out of debt