Legally reviewed by Allen A. Kolber, Esq. - The Law Offices of Allen A. Kolber, Esq., P.C.
Key Takeaways
- Your Chapter 7 discharge usually arrives a few months after filing, and the case closes after that, not before.
- A discharge erases your personal liability on a car loan but leaves the lender’s lien on the vehicle.
- Reaffirming puts the debt back on you permanently, including any shortfall after a later repossession.
- In Chapter 13, a car bought within 910 days of filing must be paid in full, not reduced to its value.
Understandably, you may be nervous about getting a new car if this is your first major purchase since filing for consumer bankruptcy. However, after your debtor education course, you may believe you have the financial management skills necessary to take on this new monthly payment. After all, you may require a car to commute to and from work, so it can be seen as an investment in your steady income resources and overall financial stability. Without further ado, please continue reading to learn what considerations to make before buying a new car and how an experienced Rockland County bankruptcy attorney at The Law Offices of Allen A. Kolber, Esq., P.C., can help you handle significant financial decisions like this post-bankruptcy.
How Long Should I Wait After Bankruptcy to Buy a New Car?
First of all, timing may be everything when it comes to buying a new car during or after your bankruptcy proceedings. If you specifically filed Chapter 7 bankruptcy, your eligible debts are typically discharged within 60 to 90 days after the first set date for your meeting of creditors, which is typically 21 to 40 days after you file the initial petition. Your case will close shortly after your discharge. Once this discharge occurs, you may immediately seek auto financing.
As for Chapter 13 bankruptcy, you may apply for an auto loan during your three- to five-year repayment plan, but only after you are granted the court’s approval. This is because any new debt, especially a significant one like this, may heavily influence your plan’s budget and overall feasibility.
For both Chapter 7 and Chapter 13 bankruptcies, the longer you can wait, the better. This is because the more recent your filing was, the riskier you may appear in the eyes of auto loan lenders. Plus, with time, you may slowly build back your credit score. This is to say that extra time may improve your chances of getting offered more favorable interest rates for your auto financing.
What Happens to the Car Loan I Already Have?
Buying a car is only half of the concern. If you have already financed your vehicle when filing, your car loan is considered a secured debt. This means you pledged the car itself as collateral, and your lender reserves the right to repossess it. A discharge will remove your personal liability for the debt, but it does not remove the lien the lender has on the vehicle. As such, what happens next will ultimately depend on the chapter you have filed and how you plan to proceed.
Your Three Options During Chapter 7
During Chapter 7 bankruptcy, you have three options on how to handle your car loan:
- You may surrender the vehicle and walk away from the loan entirely
- You may redeem the vehicle by paying the lender its current value in a lump sum
- This may be worth doing if the car is worth far less than the balance you owe
- You can reaffirm the debt, which means you may remain personally liable for the payments so the lender does not repossess the car
There is also a quieter fourth path: nothing in the law stops you from simply continuing to pay voluntarily, without signing anything.
What Reaffirmation Actually Commits You To
A reaffirmation agreement must be signed and filed with the court before a discharge is entered, and it carries required disclosures that explain the amount you agree to owe. In addition, you must file a statement detailing your income and expenses.
If that statement shows you cannot afford the payment, the law will presume undue hardship, and the court may refuse to approve that agreement. If you are not represented by an attorney, a judge must approve the agreement and hold a hearing. This is a serious matter, as reaffirming the debt means you will resume the legal obligation to repay the debt, and if the car is repossessed later, you will still owe the shortfall.
Why the Purchase Date Matters During Chapter 13
Chapter 13 is often described as letting you reduce a car loan to what the vehicle is currently worth. That is true only sometimes. Under the hanging paragraph of the Code, if the lender holds a purchase money security interest, the vehicle was acquired for your personal use, and the debt was incurred within the 910 days before you filed, you must pay the claim in full rather than its value. That is roughly two and a half years. Outside that window, reducing the balance to the car’s value may be available.
What Other Considerations Should I Make Before Purchasing a New Car After Bankruptcy?
Even if you believe the timing is right, you must brace yourself for the interest rate offers you may receive with a consumer bankruptcy case in your history. Generally speaking, subprime auto lenders, who provide loans to individuals with low credit scores, may ask for interest rates that exceed 20 or 25 percent.
You may have better luck acquiring a loan from a credit union, which typically gives interest rates ranging from 10 to 20 percent. Do not be afraid to apply with multiple lenders within a short window, as this may actually do less harm to your overall credit score.
At the end of the day, though, your legal representative may step in to review all your offered auto loan contracts. They may work to ensure that lenders are not taking advantage of you and imposing illegal fees or usurious lending tactics without your full knowledge.
Contact an Experienced New York Bankruptcy Law Firm
You should not let the pressure of handling your finances correctly post-bankruptcy rest solely on your shoulders. Please allow a skilled Rockland County bankruptcy attorney from The Law Offices of Allen A. Kolber, Esq., P.C., to assist you with your financial strategy. We look forward to helping you build a budget and such. Contact us today to learn more.
