Do you have an open Chapter 7 or 13 bankruptcy? A discharged Chapter 7 or 13 bankruptcy? Or are you simply trying to decide if filing for a bankruptcy is the right decision for you and your family?
If so, this page is for you. My passion is to help and see people achieve financial success, and having good credit plays a large role in achieving that success. I have helped hundreds of people get an auto loan after filing bankruptcy, even as early as the day of filing.
There’s a lot of information here, but it’s all important and it’s all intended to help. Take the time to read through the entire page and carefully consider your options. Then contact me to schedule a FREE, no-obligation phone consultation to discuss what’s best for you.
Every person’s situation is different, and the path to better credit and financial recovery can look different from one person to the next. Call me today so we can explore the best path for you.
If you’ve just recently filed for bankruptcy, you are probably relieved of all the weight that has been lifted. But at the same time, you’re probably worried. Will I ever be able to get another loan? Or own my own house? Will I now have to buy a car from one of those buy-here-pay-here type places? Am I stuck driving an old, unreliable junker now? Should I keep my current auto loan, or include it in the bankruptcy?
The good news is there may be options for you right now. And if you do things the right way, you can build a bright financial future by saving and investing while building a great credit score. But credit scores don’t go up by doing nothing! If you want to build your credit so that you can start qualifying for low interest rates again, you have to demonstrate the ability to repay debt.
I know, I know—you just had to file bankruptcy due to getting into debt! I am in no way advocating for anyone to get into irresponsible debt. I am suggesting that debt can be used methodically and responsibly.
I do not assume that just because someone filed for bankruptcy means that they are financially irresponsible. I have helped and known many people who had to file a bankruptcy because “life happened.” Divorce, job loss, accidents, injuries, and illness are all examples of things that can completely change your financial outlook.
And yes, there are many people who end up bankrupt because of poor financial decisions and overspending. DO NOT take out methodical debt unless you’ve learned how to manage your finances well and have developed the discipline to not overspend.
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In my opinion, the best type of methodical debt to rebuild credit post-bankruptcy is an installment loan . I recommend a small loan for a simple reason: most likely, you’ll have a higher interest rate, so the smaller the loan you take, the less interest you will end up paying.
One of the smallest types of installment loans that is readily obtainable by someone who just filed for bankruptcy is an auto loan. Other types of small installment loans, such as personal loans or loans against something of little collateral value, are very hard to get approved for while trying to rebuild out of a bankruptcy.
But do not be misled: an auto loan with a high interest rate can be a very dangerous loan. A vehicle depreciates in value and has the potential to incur expensive repairs. There are different elements in the whole transaction, from the loan itself, the person who sells you the car, and the car itself that can make the situation a financial nightmare!
That’s why I work closely with individuals to determine the best path based on all extenuating circumstances. Bankruptcy doesn’t happen for just one reason, and in the same way, there is no one-size-fits-all solution to rebuilding credit.
I’ve helped hundreds of people get an auto loan after filing bankruptcy, even as early as the day of filing. That’s right, you typically DO NOT have to wait until discharge to start building your credit! If you want to see if you qualify for an auto loan, and take the first steps towards financial freedom, you can either call me or fill out the “contact us” form.
Should I file for bankruptcy?
Filing for bankruptcy should not be taken lightly. Bankruptcy should be the last option to consider when strategizing about how to get out of the dire financial situation you may currently be in. Other things to consider before filing for bankruptcy include:
Will I ever be able to get another loan?
Yes, it is likely that you will be able to qualify for an auto loan after and even during bankruptcy. For instance, I have secured hundreds, if not thousands, of auto loans to clients who were either in a bankruptcy or already discharged a bankruptcy. But how you handle this next loan is very important for your future credit outlook. Failure to make payments on time and/or defaulting on the loan would be terrible for your credit rebuild, resulting in a very long and difficult climb to good credit.
Some things that may disqualify you from obtaining credit include:
High Debt-to-Income – If your applicable monthly debt exceeds 50% of your total gross income, many lenders will deny the application for credit.
High Payment-to-Income – Lenders also generally have a limitation as to what your payment will be in comparison to your monthly income. Most lenders have maximum payment to income ratios set at 12-15%. For example, if your gross monthly income verifies at $3,000 a month, your lender may set a maximum payment they are willing to allow at $360-450 a month.
Main Source of Income is Unusable – Many lenders have income sources they will not consider and require specific proof of income documents. Examples of income sources that lenders might not consider include and are not limited to unemployment, rideshare income, 1099 income without the required documentation set forth by the lender, under-the-table cash income, and income from a temporary job.
There are many other factors that are used to determine how lenders will score your application such as length of time at your job, length of time at your residency, and previous credit history prior to the bankruptcy.
Will I ever be able to get a low interest rate again?
One of the main reasons why I love working with clients that are in a bankruptcy or have a discharged bankruptcy is there is a viable path for them to rebuild their credit. If you do things the right way, it is possible to get a good credit score in 18-24 months. Some people can obtain a good score in less time or more time than that, but I would say that is the average span.
It’s important to remember that to increase your score, you should to use methodical debt.
Methodical debt is what I call debt that you are securing methodically to improve your credit score while using that debt for everyday expenses. Examples include:
Auto Loans (a) – An automobile is something that most people need on a daily basis and have to invest in one way or another. I have heard people give the advice of buying cheaper used cars, so you don’t have a payment. In fact, a very popular financial figure with a mainstream finance class gives this advice.
While I agree that this thinking may be good for some people, I think it is very dangerous to give this advice broadly to everyone. If you are using the majority (if not all) of your liquid money to purchase a $5,000 car, for example, you are taking on a very large risk. If at any point in the next year the car has anything major fail, it’s worth very little. So, you now have no car to drive, but also now have very little money to buy another car. Not to mention you should absolutely expect to spend money on a fairly consistent basis to keep the car running.
Also, newer vehicles are so much safer in crashes and have far more advanced safety technology. The same thought process applies to trying to obtain a loan on an older car. But the risk is much greater since you would still owe money and have a payment every month, while still having no car.
Installment Loans – An installment loan, such as an auto loan, is a loan in which there is an installed payment plan. It may be a shorter-term loan of 12-72 months, or a long-term loan that is 180-360 months, like a mortgage. The two installment loans I recommend methodically using for credit rebuild are auto loans and personal loans.
Personal Loans – Personal loans are typically a cash loan you receive that does not have any collateral. Personal loans are one of the smallest installment loans you can get, usually ranging from $1,000-5,000. Even though they’re small, it’s not easy to get approval when you have bad credit because there is no collateral for the lender to repossess to try and minimize their loss.
That being said, using a personal loan for credit rebuild likely will not be an option until you have been making on-time payments on your auto loan for a minimum of 12 months. I recommend trying to establish a banking relationship with a local credit union right away and trying to get a small personal loan from them when the time is right.
Before deciding to get a personal loan, it is very important you understand that the only reason you are getting this loan is for methodical reasons—not to just go into debt buying luxury items. For example, let’s say you get a personal loan for $2,500 and it is a two-year loan. Take that $2,500 and put it in a savings account and do not spend it. Rather, use that money to pay the payment every month. After 13 months, pay the loan off.
Your payments would estimate at $115 a month at a 10% rate, and after 13 months your estimated payoff balance would be $1,208. Since you did not spend a single dollar of that loan on anything but the payments, you should have about $1,005 left in that account to go towards the $1,208 payoff, meaning it cost you roughly $203 to have a positive, paid-as-agreed and paid-off loan. That $203 is well worth it! It just takes discipline to not touch that money. If you don’t think you have that level of discipline, do not use this method.
Credit Cards – Credit cards are referred to as revolving debt. In contrast to an installment loan, where there is an installed payment plan, revolving debt has a minimum payment that typically barely covers the interest charged for that month. Due to that, if you have a credit card and make the minimum payment only, it will be a very long time before you pay off the loan and it will cost you a lot of money in interest. It is very important to use credit card debt as methodical debt.
For example, let’s say you get a credit card with a $250 limit. Only use that credit for gas at the pump. That way you can avoid swiping your bank card at the pump and risk it getting skimmed. Also, gas is something you would buy regardless. Once you buy the gas, immediately turn around and make a payment to your card for that exact amount. This way you avoid interest and will keep a low balance on the card (keeping a balance at anything higher than 33% of your limit will hurt your credit score).
Like the installment loan method, the credit card method requires discipline to not spend money on items that will not be paid off right away. If you don’t think you have that level of discipline, do not use this method.
WHY IT’S EXTREMELY IMPORTANT WHO YOU WORK WITH ON THE AUTO PURCHASE AND THE LOAN
It’s bad enough that you will have to go through at least one high-interest-rate loan to achieve a good credit rating. So, you want to make sure that the loan you end up closing on is the best loan that is available to you. You want to work with someone like me who has a deep understanding of all the programs available from all the lending sources available. Someone who doesn’t use the same lender over and over just because they like their Dealer Relationship Manager the best, or simply because they don’t know of any other programs. I’m familiar with many lenders and know how to maximize their best available pricing. I’ll exhaust all of my resources in an effort to make sure that the loan you close on is the best one for you. For example, what if one lender was at 18.95% for an interest rate, but there is another lender offering an 8.95% rate under the right circumstances—and we could meet those circumstances? You absolutely would want the rate that is 10 percentage points lower!
THE VEHICLE – The goal is to refinance the loan to a much lower rate as soon as possible. Given that the initial loan will be a higher rate loan, the sooner you can get out of that loan the better. That is easier said than done. Most people in this industry will simply tell you to come trade your car or refinance the loan in a year. What they do not tell you is that you very likely won’t have that option.
First off, it typically takes 18-24 months to achieve a score high enough to refinance into a better rate. (Right now, I am teamed up with a credit union in town that will consider a refinance after 18 on-time payments and a minimum of a 640 score.) Secondly, they fail to mention how loans are amortized. Every monthly payment made is amortized, in which a portion of the payment goes towards the principal balance of the loan and a portion is paying interest. In any loan, high interest or not, you are paying more of the interest in the beginning portion rather than the end. With a high interest rate loan, the majority of your payment will be paying interest, with the minority paying down the principal.
So that being said, along with the fact that cars naturally depreciate in value every month, when it is time to refinance or trade the car, it’s likely that you have a lot of negative equity, meaning you owe more on the car than what it is worth. So, let’s say that you worked hard to increase your credit score. You took all of my advice and you achieved a 700-credit score. Fantastic! You can qualify for a great interest rate now! But unfortunately, the bank tells you that you have $7,000 of negative equity and they will approve you for a low-rate refinance, but you need to come to the table with most of that $7,000 down at closing. So, unless you have that money sitting around, you are stuck in the high-rate loan, and the problem doesn’t get better.
That’s where I am a big advantage to you. My job is to help you achieve financial success, not simply slang cars. I advise my clients on the right scenarios and the right type of vehicle that will set them up for financial success in the future. Also, the vehicle must be a reliable, dependable vehicle. It would be devastating for your credit future to take out a high-interest loan on a vehicle and have it break down while still paying on it if you cannot afford the repair. That scenario almost always ends with a defaulted loan.
THE PERSON AND COMPANY – Unfortunately, I happen to work in an industry in which greed is very prevalent. What is even more unfortunate is that the greediest department of all in this industry is oftentimes the “Special Finance Department.” You read that correctly. The department in the dealership that is dedicated to working with customers who are in a poor financial situation is the department that is the greediest. You are told what car you can buy based simply on what makes the dealer the most amount of money. Your needs and what’s best for you, both in the present and future, are completely neglected in favor of huge commissions. And if you don’t want that vehicle, you are told something like, “Well, if only you had better credit, then you could buy whatever you wanted!” Basically, shaming you for your low credit rating. I don’t recommend buying a car from a dealer even if you have good credit. I highly discourage it if you have a bankruptcy! I understand your credit score isn’t your worthiness score. I understand life can happen and bad things can happen to good people. I am dedicated to helping my customers get in the best possible situation for them and setting them up for financial success. I am also backed by Auto Aves, a company that equally shares the same values.
What are my options if I’m already making a car payment?
You typically have three options if you currently have an auto loan. This decision is one that is more complex and will require more information to decide which option is best for you. I will always recommend the option I think is best for you, period. Call me or email to set up a call to discuss your specific situation.
Here are what the three options are:
REAFFIRMATION – This requires you to sign papers that your bankruptcy attorney will obtain. This excludes the loan from the bankruptcy; the debt will not discharge, and you are responsible for the loan. Sometimes this is your best option, but it is of extreme importance that we know definitively that it is the best option before you sign those papers.
DISCHARGE THE LOAN BUT CONTINUE TO KEEP THE PAYMENTS UP-TO-DATE – Most lenders will not repossess the vehicle if the payments are made on-time every month. So, in most cases, you can keep making the payments and keep the vehicle even when the debt has already been discharged in the bankruptcy. The disadvantage is that you will not receive credit for the on-time payments, which means your credit won’t improve like it should.
DISCHARGE THE LOAN AND SURRENDER THE VEHICLE – This option is the most common. As long as you can qualify for an auto loan, the first two options aren’t the best way to advance your credit future. You were given a fresh start with your bankruptcy, which also includes a fresh start with your auto loan.
Please call me or email me to schedule a FREE, no obligation phone consultation to discuss your situation and what is best for you.
Will I now have to buy a car from one of those buy-here-pay-here type places?
This is rarely ever a good idea. If you are considering this, please call me first to learn if you have better options available.
Please know that Tim Fleury is not an attorney, nor is Cars Simpler, and is not giving legal advice what-so-ever. Tim has many years in dealing with bad-credit situations. These are strictly his opinions. He highly recommends talking with a reputable bankruptcy attorney for legal advice and a financial advisor for financial advice.