Chapter 13 Auto Financing
Purchasing a vehicle in a Chapter 13 Bankruptcy is different than buying a car under any other circumstances. There are a couple of extra steps in the process than for Chapter 7 Auto Loans, but if done correctly, you will still end up with a reliable vehicle that will help you rebuild your credit.
The most unique concept of buying a car while in a Chapter 13 is that you will need to get approval from the bankruptcy court/trustee to buy a vehicle. In Washington, it is often called a Motion to Incur Debt. The motion usually will say something like this: “The debtor (you) is allowed to finance up to $15,000 and have up to a $400 monthly car payment.”
For the better auto loan programs, it is important that your plan is confirmed. It is still possible to buy a vehicle without your Chapter 13 plan being confirmed, however, you will typically need a larger down payment. The best loan programs all require that your Chapter 13 plan be confirmed.
Here are some other things you need to know before shopping for a vehicle while in a Chapter 13 Bankruptcy:
1. The lender will control the vehicle requirements.
We have had customers waste 20-30 hours at dealerships because they wanted to shop for a vehicle. Even though we told them it was a bad idea, they kept coming back or going to other dealers. Then when they finally got the plan confirmed (as Prestige Financial requires) and the letter signed by the judge, they found out they did not qualify for any of the vehicles they were looking at. In fact, those particular customers needed $3000-4000 down to buy anything, and more to buy the vehicle they really wanted.
People almost always pick out something that is too expensive, has too many miles on it, is too old, or just will not work with the amount of down payment they actually can come up with. It is not their fault, it is just human nature. Make sure that you deal with someone that understands Chapter 13 Auto Loans, and not just a car salesman at some random dealership so that you are given accurate information as to what kind of vehicles you can look at.
2. Some lenders (i.e. Prestige Financial and Avid) will not issue an approval until the letter is signed by the judge.
There are basically 5 lenders that do Chapter 13 auto loans in Washington right now and we have all of them. The best banks for the customer are Prestige and Avid . However, they automatically turn down all applicants until they see the plan is confirmed and a letter is signed by the judge. We can usually tell who is going to qualify for Prestige just by looking at the bureau and asking a few questions. Since Prestige has historically been the only auto lender that offers $0 down options for Chapter 13 auto loans (in Washington), it makes sense to try to get our clients signed up for their program. If our clients do not qualify for Prestige, or they cannot wait for the plan to be confirmed in order to buy a car, it is important that they know that they will need to put money down to get a bankruptcy auto loan. The exact amount will largely depend on what tier the lenders put them in and what vehicle they decide on (out of the vehicles the lender will qualify them for). For most people, the minimum down payment they will need is $1,000-$2,000. If the customer is very picky, the down payment will go up dramatically.
Why you shouldn’t go car shopping in a Chapter 13 Bankruptcy:
One lender (Drive) will lock the customer out of their system for 60 days after an initial approval expires. It is really sad when this happens, and it usually goes something like this:
1. The lawyer tells client they should go shopping for a car.
2. Client goes to a bunch of dealers, most do not know how to help.
3. One of the dealers (or more) “Shotguns” the credit application to a bunch of banks, including Drive Financial. Drive gives a conditional approval (requiring signed motion, down payment, as well as other requirements). Customer goes back to lawyer with purchase order and they submit everything for approval with the judge. By the time the Motion to Incur debt is signed, the approval is expired. Drive’s new policy prohibits their system from giving that customer another approval for 60 days after the previous approval expires.
Now instead of waiting for only a month to get the new car, the customer has to wait 3 months…assuming they do not qualify for Prestige or Avid Acceptance, and do not want to go through Credit Acceptance, Drive, or 722 Redemption.
Our Advice for Anyone in a Chapter 13:
- Talk to your Lawyer. Let him/her know you want to buy a car outside of your Chapter 13 plan. If your attorney thinks you budget for a car payment, proceed to the next step.
- Talk to someone who helps a lot of people in Chapter 13 obtain auto financing…like us.
- Don’t waste too much of your time by going out looking at cars that will probably be sold to someone else by the time you have a signed motion to incur debt. There are lots of cars out there. Your loan experts will tell you when it is time to select your car.
- It can take about a month (but I have had it take as long as 6 months and as little as 2 weeks) to get a motion signed by the judge. Cars do not stay around that long. You also have to account for book value changes, which affect the amount of money a lender will advance on any vehicle.
If you are in a Chapter 13 Bankruptcy, come see us and we will review your situation, and give you an idea as to what will work for your loan.
We work with many major lenders that are helping people get Chapter 13 Auto Loans for people just like you.