Chapter 7 bankruptcy is embarrassing. It feels horrible, you lose so many things important to you, and we’ve been culturally indoctrinated to treat it as some sort of massive “failure.”
What’s almost worse is that it TAKES so long. The paperwork, the meetings, the reworking how you live your life – like you’ve committed a crime instead of run into a wall.
I’m not suggesting we have a party to celebrate chapter 7 bankruptcy or anything, but let’s be realistic. There are PLENTY of reasons someone might end up having to file. Medical bills, job loss, divorce, accidents – sometimes stuff happens, even when you’re doing everything right. Chapter 7 bankruptcy is a bad experience, but it doesn’t mean you’re a bad person.
Car Loan After Chapter 7 Bankruptcy?
As I type this, in fact, experts are predicting a surge of chapter 7 bankruptcy filings as a result of the economic disruptions brought about by the Covid-19 virus. Obviously we all hope it doesn’t come to that, but if it does, most of those people won’t have done anything “bad.” It sucks, but that’s how the world can be.
Even if you made some bad decisions that led to chapter 7 bankruptcy, at some point you have to focus on the future rather than lamenting the past. Of course, you want to learn from any mistakes, whether they were your own or others. You may need to change some behaviors. Make better choices, no matter how difficult. But in the grand scheme of things – Covid-19, drug lords, political corruption, terrorism, rape, murder, and abuse? You messed up by getting into more debt than you could handle. Yes, that’s bad. Boo debt! Boo not PAYING your bills!
But are you a bad person? Not by my measure, friend. Being that kind of bad requires malice or at least a reckless disregard for others.
So… are you a failure? Not unless you stay down and don’t start getting back up again soon.
What Is Chapter 7 Bankruptcy?
What many people overlook is that chapter 7 bankruptcy is BY DESIGN a chance to reboot, to start fresh, to do better. It’s a giant financial “do over” in many ways.
The term itself comes from chapter 7 of Title 11 in the U.S. Bankruptcy Code – the written laws that dictate how this sort of thing is handled. It’s intended to be a protection for consumers, not from paying your bills, but from things like debtors’ prison. Before bankruptcy laws, people unable to pay their debts were often simply locked up – and not in the best of conditions. You stayed until someone with enough money to pay off your debts (and then some) decided they cared about you enough to get you out. If you had lots of rich friends who liked you more than they liked staying rich, you’d have no problem. Otherwise, it was often quite literally a life sentence. Or perhaps “death sentence” would be more accurate.
If you remember learning about “Shays’ Rebellion” in high school – one of the triggers for tossing the Articles of Confederation and writing what became our brand new U.S. Constitution – that was largely a revolt against debtors’ prisons. It’s Article I, Section 8 of that Constitution which authorizes Congress to write some laws governing how bankruptcy works in what was then still a very new nation. And they did. States have some wiggle room when it comes to protecting debtors – the people to whom you owe money at the time you first file for chapter 7 bankruptcy. The basic process, however, should be the same no matter where in the U.S. you live.
Bankruptcy Comes With Modern Society
In short, as society progressed, bankruptcy protection was born. The goal isn’t to make it easy to avoid your responsibilities, but most government protections are there to shelter us from the worst possible consequences even when we are partly culpable. If I leave something too close to the stove and my home catches fire, there will be consequences. I will lose things and it will hurt, but the local fire department won’t ask if I screwed up before they agree to spray water on my house and grab my cat. Their willingness to save as much of your stuff as they can isn’t meant to encourage you to light more things on fire.
Bankruptcy is an effort to put out the fire. Obviously it’s ideal if you can avoid new fires in the future, but that’s not the same as deserving blame blame blame and shame shame shame.
Can you tell that I feel strongly about this?
How Does Chapter 7 Bankruptcy Work?
We’re going to settle for a general overview here since my goal is to talk about moving past chapter 7 bankruptcy rather than a “how to” guide. If you’re considering bankruptcy, read on, but then consult with a lawyer about your specific situation. I’m Mr. Overview here – a great place to get started and maybe help you know what questions to ask.
Chapter 7 bankruptcy is sometimes called “liquidation bankruptcy” because it attempts to move things along fairly quickly by “liquidating” (selling) your assets to pay off some of your debts. It’s different from chapter 13 bankruptcy, which is almost like a debt restructuring plan. With chapter 13, you get to keep more (or all) of your stuff and essentially repay your debts over a longer time period. It’s a bit more involved than that, but for now, that’s enough to give you an idea of how it’s different than chapter 7 bankruptcy.
If you file for chapter 7 bankruptcy, the court will place a “stay” on your current debts. This means creditors are temporarily banned from demanding payments, repossessing your stuff, foreclosing on your mortgage, or garnishing your wages. It’s a giant “HANG ON A SEC AND LET’S SORT THIS OUT’ from the legal system. The flip side of this is that this same court immediately takes legal possession of everything you own.
Well, OK – not EVERYTHING. Many things are exempt. By lots of what you own. The point is, it works both ways – debtors have to chill for a moment, but you’re not exactly off the hook, either.
How Does The Court Manage Bankruptcy Process
The court will appoint a trustee who manages everything going forward. They’ll distinguish between the exempt property (stuff you can’t lose in the bankruptcy) and non-exempt property (stuff you probably will). Exempt items often include your home, one vehicle, personal jewelry, essential appliances, books, toothpaste, socks, etc. Here’s where the protections of chapter 7 bankruptcy become clear – no one’s allowed to come to grab your family photo albums or take your microwave. On the other hand, if your home or car is worth enough, they may sell them anyway and make humbler arrangements.
Non-exempt items of potential value are then sold and the money distributed to your creditors based on a hierarchy we’re not going to worry about right now. The fact is, you can lose a lot of stuff the law doesn’t think you need in order to function. Maybe you don’t have much value, to begin with, or maybe you do and don’t realize how hard it will be to let it go. Chapter 7 bankruptcy is no fun, my friend.
After six months or so, many of your remaining debts are “discharged,” or canceled. Credit card balances, car payments, medical bills may be among them. Some debts aren’t eligible to be discharged – student loans, taxes, alimony, and child support, for example. You have to pay those one way or the other.
How Can I Get A Car Loan After Chapter 7 Bankruptcy?
You have several options for car loan shopping. That in and of itself should be celebrated. You have a chapter 7 bankruptcy in your past and STILL, you have SEVERAL options.
Let’s recognize going in, however, that none of them is ideal. Your credit score always impacts the type of loan you’ll be able to get, including maximum amounts and interest rates. The first car you finance after a bankruptcy probably isn’t going to be your dream car, but remember – we’re starting over. We’re rebooting and rebuilding. We can live with an older vehicle in good shape for a few years.
I’m not talking about a rust-bucket that’s been badly spray-painted with springs sticking up out of the seats or anything. Just a slightly older, less expensive model to get us started.
The number of Americans borrowing money to purchase a car or truck is going up. What is the impact? The average debt for that car or truck is going up too! #AutoLoanStatistics #AutoFinance #ShopCarLoan https://t.co/XVsgxF2RoG via @YouTube
— Loanry.com | Loan Shop ? (@LoanryStore) May 7, 2020
Option #1: Traditional Options
Don’t automatically assume your local bank or credit union is going to turn you down, or that the major dealers in your area won’t offer you financing. The competition they face from reputable online lenders and other alternative financing has changed the game a bit, although how much will vary widely from institution to institution. Your odds are better if you’re a long-time customer, even if that just means small checking and savings accounts.
Be ready for some painful terms, and don’t take ANY of it personally even if they turn you down altogether. At the same time, I wouldn’t automatically accept the first thing they offer you. Find the time to compare interest rates from different lenders. Just because you’re going to have trouble finding great terms doesn’t mean you won’t have options. If you’re employed and can show fairly reliable income over the past year or more, you may be surprised how eager they are to work with you no matter what’s happened in your credit past.
But you won’t know until you ask.
Option #2: Smaller Local Dealerships
Smaller lots probably only deal in used vehicles. Many come with little or no warranty and only their verbal guarantee of condition. If you’re comfortable applying for a used car loan, that’s great. If not, offer to buy lunch for a friend or family member who is. The good news is, they often offer to finance to folks who wouldn’t otherwise qualify. A subtle hint you can look for is the giant sign saying something like, “BAD CREDIT AUTO FINANCING.”
Details will vary – you may be looking at weekly payments or a larger down payment or some other arrangement you wouldn’t find from a traditional source.
You don’t have to take the first offer, but don’t write them off too quickly, either. Remember, we’re rebooting and rebuilding, and you have to start somewhere. You may feel like you’re taking a chance on this unknown little dealer, and you are – but they’re taking a chance on you as well. What if you’re both honest, hardworking people doing your best?
Option #3: Online Lenders
The 21st century has changed lending substantially. The lower overhead and national reach of online lenders means they’re able to be creative and competitive in ways it’s almost impossible for traditional lending institutions to match. Some even specialize in bad credit auto loans. The process is usually quick and fairly straightforward, and if approved, you may see the money deposited in your account in 24 hours or less.
The only trick, really, is sorting through them. That’s where we come in. Loanry maintains a curated database of some of the most reputable and creative online lenders available. When you let us know what you need, we scour our database looking for the lender most likely to make a good match. It’s then up to that lender to win you over and keep you happy.
Also, you have a lease option for buying a car, but in this situation, it is better to skip this possibility.
That’s right – they’re competing for YOUR business, not the other way around. And isn’t that how it should work?
Once You’re Approved
It’s good that you have a car; it’s better that you have a chance to rebuild your credit. If you don’t already have a workable household budget, make one. Use it. If you’re not sure how, we’ve written about them repeatedly here – do some homework. It will be worth it.
It probably goes without saying, but MAKE THOSE CAR PAYMENTS on time, every time. It’s not just about the car or the dealer, it’s about a new mindset and new habits and a new credit history. The longer you avoid new credit trouble, the higher your score. The higher your score, the better your options. Do you see a pattern?
What Does Chapter 7 Bankruptcy Do To My Credit?
I wish I could put this more gently, but it’s brutal to your credit score and a major stain on your credit history. Chapter 7 bankruptcy can stay on your credit report for up to ten years, although some of the specific debts will go away earlier than that.
In other words, it’s bad.
So, we’re accepting that upfront. If there are feelings associated with this reality, let’s go ahead and feel them while we’re at it. But friend, as we used to say not that many years ago, it is what it is. It’s done. The biggest question now is, “Now what?”
If you have a little time before you absolutely must buy another vehicle, I suggest doing the sorts of things I’d recommend if you had no credit one way or the other, to begin with. Even six months or a year (better yet, TWO years) of doing the right things can make a major impact on your credit.
How To Improve Your Credit Score: Credit 101https://t.co/vuOIwooBNr
— Loanry.com | Loan Shop ? (@LoanryStore) December 3, 2019
What Sorts of Things, You Ask?
Get a secured credit card. These are the ones where you actually have money deposited ahead of time (or tie them to your savings account) to “secure” your credit card use. You can then use it just like a credit card. Partly this gives you flexibility and convenience that cash doesn’t always offer (you ever try to book a hotel room on the phone without a credit card?). Mostly, though, it helps begin rebuilding your credit. Timely repayment is treated just like repaying any other credit card for purposes of your credit score, despite the fact that you literally have the money already set aside to back up every purchase.
Borrow with a co-signer. If you need something too expensive to pay cash but smaller than a house or car, consider using store financing. Most anywhere that sells refrigerators, computers, or furniture, offers some sort of financing to make it happen. A co-signer is a trusted friend or relative with strong credit who agrees to “partner” with you on the loan. Even though you’re primarily responsible for repayment, if you miss a payment for any reason, they’re liable for your debt. This can help you get approved even when you have poor credit. On the other hand, this can be a relationship-killer if you default and they’re stuck paying your debt.
If you have a chapter 7 bankruptcy in your past, that’s where it should stay – in your past. It may impact your options, but it doesn’t define everything about you, even financially.
Take what steps you can to begin rebuilding.
Don’t be afraid to ask for help.
Start small and avoid repeating past mistakes.
You. Got. This.
If you ever need reminding, or want to look into that “online lender” thing a bit more closely, let us know. We’ll be glad to help.
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.