Bankruptcy is not the “life sentence” many expect it to be. Once someone files for bankruptcy they are eligible to take on new debt as long as someone is willing to give it to them and the court approves of it. The crucial rule to remember is that credit can be quite delicate following a bankruptcy agreement, so people must be careful to not take out loans that they are unable to handle.
This problem is made worse by the fact that creditors often saddle post-bankruptcy individuals with higher interest rates and more demanding loan terms. Buying a car after filing for bankruptcy, here are some tips to keep you on the path to finding new set of wheels:
Fix Your Credit Any Way You Can
You may already have a good idea of what is on your credit report following the painful litigation process, but obtain a copy to make sure that everything listed is accurate. For instance, you may have debts listed that were actually paid off, which can count against you even after you file Chapter 7 or Chapter 13.
Look for differences between the three credit reporting agencies to spot red flags. You can often file for a revision or get the company you supposedly owe to erase the blemish on your behalf.
Pay particular attention to old auto loans since they are the most relevant part of your credit history when applying for a new car loan. Loans in repayment that were reaffirmed will show up on your history, but loans that were not reaffirmed will be missing even if you are still making payments. Visit the lender or dealer to receive proof of payments if they can add to your credit history.
Go Cash Only as Much as Possible
Shy away from all forms of credit as much as you can for the first year. Try to stick to cold, hard cash except when you deposit your income checks into your bank account. Even things like debit cards and automatic bill pay should be avoided since they can lead to forgetfulness and overdrafts, setting you right back into the hole you just triumphantly escaped from.
Once you have had room to breathe, you can open reliable credit-building accounts like a secured credit card or a local credit union account.
Save, Save, Save
Save up some cash for an emergency fund and then a down payment for your vehicle. The more you are able to put down, the friendlier your loan requirements will be. A hefty down payment can also keep you from being immediately upside down in your new auto loan right off the bat. Trade in an existing vehicle if you need to free up cash.
Set Your Sights Low
Find a used car or a new vehicle that is affordable. Make sure that it is reliable and will not be expensive to keep running. Search for cars with good gas mileage and a reputation for low maintenance costs. Try to find a car between $5,000 and $15,000 so that you can pay it off in full quickly and then trade up to a car that better suits your needs.
Make sure that you shop around for loans and avoid lenders that are trying to take advantage of your precarious position. Used car lots that proudly state “Buy Here, Pay Here” often have ridiculously strict terms and high financing costs. Worst of all, the vehicle may end up dead before the loan is paid off.
Be smart and protect yourself by looking for the best interest rate and loan requirements possible. Credit unions, local banks and specialty online lenders are often more willing to give you a chance without trying to send you back into bankruptcy again.
Once you have made consistent payments for a year or two, your credit will have improved. You can then refinance to secure a better interest rate and keep your loan as manageable as possible. If you are able to budget appropriately and save for emergencies, bankruptcy can be a new beginning for your financial life rather than a tragic final chapter.