Bankrupt ManDeclaring bankruptcy should be a last resort to solve financial difficulties, but it does not have to be the end of the world. It is perfectly possible to buy a vehicle after declaring bankruptcy. However, you must be prepared to pay more for your vehicle’s financing and insurance than someone who has never declared bankruptcy.

What Happens When I Declare Bankruptcy?

Bankruptcy is a legal action that tells creditors you cannot pay them what you owe. Many people declare bankruptcy after losing a job or having some other financial reversal. Others find that they have simply overextended themselves and cannot pay their bills on time.

Most people file bankruptcy with the help of an attorney, although it is possible to file bankruptcy pro se. Bankruptcy actions are filed in federal court and are overseen by a federal bankruptcy judge and, in many cases, a bankruptcy trustee appointed by the court. The trustee takes in funds from debtors and distributes them to creditors as they become available.

Bankruptcy wipes clean the debts owed to various creditors, releasing the debtor from the legal obligation to pay those bills. However, this advantage comes with a price: bankruptcy also stays on a credit report for at least seven years, alerting future creditors to the fact that the debtor was insolvent and unable to pay his or her bills.

Can I Finance a Car After Bankruptcy?

While many lenders will not finance someone who has declared bankruptcy, there are many companies and banks that are willing to work with these customers. One reason that some lenders are anxious to secure post-bankruptcy business is that debtors are typically barred from filing for bankruptcy for several years after a discharge.  This means that if the debtor has any type of asset to seize, the lender will be able to do so without the threat of another bankruptcy filing for a period of time.

Another reason that many banks and lenders will work with post-bankruptcy debtors is that they can charge much higher interest rates than normal to these borrowers, justified by the extra risk they are taking in making these loans.

What Can I Expect With Post-Bankruptcy Financing?

Typically, those who have filed bankruptcy can expect to pay a much higher interest rate than those who have not. Some lenders charge ten times as much interest to bankruptcy clients as to those with excellent credit. This means that a car loan after bankruptcy is likely to be very expensive.

Loans are not the only thing that will skyrocket in cost after a bankruptcy. Many states allow insurance companies to use credit history as part of the determining factor in setting premium rates. Bankruptcy customers will pay much more in premiums than those with good credit ratings.

How Can I Lower My Post-Bankruptcy Costs?

There are several ways to lower the cost of financing your car after a bankruptcy, including:

  • Shop around. Lenders will often charge whatever interest rate they believe customers will pay. Shopping for competitive pricing may reveal that other lenders are willing to let you have money for less.
  • Keep your car. It is cheaper in the long run not to finance a car immediately after a bankruptcy, especially if you already have a working vehicle. Keep the car you have and save your money toward a cash down payment for a new car, which may lower your overall interest rate when you do finance.
  • Pay cash. If you can save enough to pay for a vehicle without financing, you may be able to save yourself thousands of dollars in interest. Start by putting the amount you would expect to pay for a car payment into a savings account and see how fast it builds up to a new vehicle.
  • Go cheaper. If you can find an inexpensive car that still runs well, you will be far better off financially by choosing this vehicle over a more expensive one. Not only are cheaper vehicles more affordable but they usually cost less to insure. Choose your vehicle type wisely, as well; a sedan is usually more affordable to finance and to insure than a sports car.
  • Pay on time. If you make the payments on time for your car for a year or more, you may be able to refinance at a lower interest rate, saving yourself money every month.

With the help of these tips, you may be able to find an affordable car loan, even after bankruptcy.