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Qualifying for Auto Loan Discharge in Chapter 7 vs Chapter 13 Bankruptcy

Qualifying for Auto Loan Discharge in Chapter 7 vs Chapter 13 Bankruptcy

Filing for bankruptcy can provide much-needed relief if you are overwhelmed with debt. However, it also makes getting approved for future loans more challenging. This is especially true when it comes to auto loans.

If you file for bankruptcy and want to buy a car, you may be wondering how long you have to wait and what your options are. The answers depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.

Waiting Periods for Auto Loans After Chapter 7

With a Chapter 7 bankruptcy, you can potentially get approved for an auto loan as soon as you receive your discharge. This is usually around four to six months after filing.

However, even though you can start applying once your Chapter 7 discharge goes through, you will likely face higher interest rates and stricter loan terms. Most lenders see bankruptcy as a red flag, so you will be classified as a subprime borrower.

This means you should expect interest rates around 15-20% or higher when trying to get a car loan after Chapter 7 bankruptcy. You may also encounter lenders that require a down payment of 20% or more.

Waiting Periods for Auto Loans After Chapter 13

The waiting period is longer if you file for Chapter 13 bankruptcy. With Chapter 13, you must complete your entire 3-5 year repayment plan before discharged debts can be removed from your credit report.

This means you will likely need to wait the full term of your Chapter 13 plan before applying for auto financing. Most lenders will want to see that you made consistent payments and completed the bankruptcy process.

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The good news is that your credit score can start to improve during the Chapter 13 repayment period. If you make timely payments each month, it shows financial responsibility.

Qualifying for Auto Loan Discharge in Chapter 7

For Chapter 7 filers, your auto loan balance can potentially be wiped out entirely. However, for this to happen, you must meet specific criteria:

  • Your auto loan must have originated at least 910 days (2.5 years) before filing for Chapter 7 bankruptcy
  • Your monthly income cannot exceed the state median
  • You must pass the Chapter 7 means test

If you meet these qualifications, your auto lender has to write off the remaining loan balance. This is known as cramdown, and it allows Chapter 7 filers to keep their vehicle without continuing to make payments.

The 910 Day Rule

The 910 day or 2.5 year time period is critical. If your auto loan originated more recently, the lender can repossess the vehicle even after you file for Chapter 7 bankruptcy.

The 910 day rule was designed to prevent people from abusing bankruptcy to get out of auto loans on newer vehicles. If your loan is less than 2.5 years old, cramdown will not apply.

State Median Income Requirements

In addition to the 910 day rule, your income must fall below your state’s median level. Each year, the Census Bureau releases state median incomes based on household size.

If your household income exceeds the median, you cannot qualify for Chapter 7 cramdown on your auto loan. This income test aims to limit abuse by higher-earners.

Chapter 7 Means Test

Finally, you must pass the Chapter 7 means test. This review compares your income to average living expenses based on where you live. It determines whether Chapter 7 bankruptcy is appropriate for your financial situation.

If the means test flags too much disposable income, the court can deny Chapter 7 eligibility. Failing the means test would also disqualify you from cramdown on your auto loan balance.

Qualifying for Auto Loan Discharge in Chapter 13

The rules are different if you file for Chapter 13 bankruptcy. Under Chapter 13, total loan discharge is not guaranteed. However, you can potentially reduce your monthly auto payment.

To lower your auto loan payment in Chapter 13, you must file a motion with the court. This requests a cramdown to the current market value of your vehicle.

For example, if you owe $15,000 on your auto loan but the car is only worth $10,000, you can ask the court to reduce the balance to the $10,000 value. This lowers your monthly payment.

Courts typically approve these motions if the vehicle is worth less than the remaining loan amount. However, the judge has discretion to deny the request in some cases.

Finding Lenders That Work with Bankruptcy

If you need an auto loan after bankruptcy, finding a lender that will work with you is key. Some options to consider include:

  • Local banks and credit unions – Many are more flexible than large national lenders
  • Subprime auto lenders – They specialize in borrowers with past credit problems
  • Online lenders – Can offer quick loan decisions without visiting a dealership

No matter where you apply, being prepared will improve your chances. Gather documents that demonstrate your current income and ability to make payments. Also have your bankruptcy paperwork ready to explain the details.

Shopping for the Best Auto Loan Terms

Because lenders view bankruptcy as high risk, it is extra important to shop around for your auto financing. Comparing multiple lenders is the only way to find the best interest rate and loan terms.

Online auto loan marketplaces like LendingTree make this easy. You can complete one application and receive offers from their network of lenders. This allows you to evaluate all your options in one place.

Pre-qualification on LendingTree is also soft, meaning it does not affect your credit score. There is no downside to applying and comparing offers.

Improving Your Credit Before Applying

Another strategy that can help your auto loan chances is working to improve your credit first. Try to wait at least 6-12 months after bankruptcy before applying.

During this time, focus on responsible credit habits such as making other loan payments on time and keeping balances low. Pay off collection accounts if possible.

You can also become an authorized user on someone else’s credit card. This allows you to benefit from their good payment history.

It takes time, but boosting your credit score even a small amount can open up better auto financing options.

Alternatives if You Cannot Get Approved

If you have no luck getting approved for an auto loan, all is not lost. Here are some options to consider if your bankruptcy makes financing impossible:

  • Buy an inexpensive used car with cash – Save up to make an all-cash purchase. This avoids the need for financing.
  • Ask a relative to co-sign – A co-signer with good credit can improve your chances significantly.
  • Try ridesharing – Services like Uber allow you to get around without owning a vehicle.

Talk to your bankruptcy attorney as well. They may know lenders in your area that work with filers. An attorney can also advise you on rebuilding credit or exercising other options.

The Bottom Line

Qualifying for an auto loan after Chapter 7 or Chapter 13 bankruptcy involves patience and perseverance. But with a strategic approach, it is possible in most cases. Be prepared to shop around and explore alternatives if your first attempts are unsuccessful.

If you can show consistent income and financial responsibility, there are lenders willing to work with bankruptcy filers. Seeking their help can put you back on the road to reestablishing your credit.


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