If you need to buy a car during your Chapter 7 bankruptcy, or after your bankruptcy is over, don’t despair. Most likely you will be able to get a car loan. Or, you might be able to pay cash for a very cheap car. Here are some strategies to consider if you need to buy a car during or after your bankruptcy:
1. Stop making car payments, enjoy your ‘free ride’ and then buy something cheap for cash with the money you saved.
As soon as you file for Chapter 7 bankruptcy, you ordinarily get a “free ride” due to bankruptcy’s automatic stay. The automatic stay ordinarily protects your vehicle from repossession for about two and one-half months (that is, until 45 days after the first meeting of creditors in your bankruptcy case). In fact most car lenders will not repossess your car until after the bankruptcy discharge.
If you already received your bankruptcy discharge, you can still quit making payments and have a “free ride.” Most lenders won’t repossess a car until you behind about two months. Save up the money and use it to get yourself a cheap “runner” to drive until you can get into something better.
Some organizations offer very cheap cars for sale, and sometimes private parties so too. For example, both the Salvation Army and Goodwill sell cheap running cars that have been donated.
Tip: If your car is in danger of repossession, remove any valuables and personal effects from the car.
2. Buy a car with financing after bankruptcy.
In Los Angeles where I practice bankruptcy law, my clients are aggressively solicited by new car dealers, offering to finance or lease them a new car. They specifically target people emerging from bankruptcy as sales leads. The debtor can usually get into a new car, or even a late model used car still under warranty, even with bad credit, provided they have decent income. This may be a far better alternative than it would have been to make a bad reaffirmation deal in the bankruptcy. (Learn more about reaffirming a car loan in Chapter 7 bankruptcy.)
Why buy a new car when you really don’t need one? A new car loan can quickly improve your credit if you pay on time, where as the unreaffirmed car loan will not help your credit. It likely will represent a better investment than keeping the old car with upside down financing on it. It’s also likely that the new car will probably be more reliable transportation, and will come with a warranty.
3. Get help from a friend.
Turn in the old car if a friend, loved one, or family member will buy or lease something for you.
4. Rent or borrow a car while waiting for your discharge.
Some companies will rent cheap used cars on a monthly basis. The payment for these monthly rentals can be less than the payments on your existing car loan. After you receive a discharge you can probably purchase and finance a new car if you have steady income.
Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California. He is a partner at Bayer, Wishman & Leotta. The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo. By answering a question on this blog, Mr. Bayer does not become your lawyer.