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 there are 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 letter usually will say something like this: “The debtor is allowed to finance up to $15,000 and have up to a $400 monthly car payment.” There seems to be some discrepancy depending on who you ask, for how to start this process.
Lately I have heard some bankruptcy lawyers tell their clients to go shop for a car, and once they find one, come back and get the process started with the attorney.
There are several reasons why this is a bad idea.
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.
2. Some lenders (i.e. Prestige Financial) will not issue an approval until the letter is signed by the judge.
There are basically 4 lenders that do Chapter 13 auto loans in Washington right now and we have all of them. The best bank for the customer is Prestige . 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.
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 letter, and down payment, as well as other requirements). Customer goes back to lawyer with purchase order and they submit everything for approval with the judge. A month later the approval expires. 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, UACC, or 722 Redemption.
Some judges are now asking for a purchase order/contract with vehicle info on it in order to get a signed motion to incur debt. However, it wastes our customer’s time to go out looking at cars that will probably be sold to someone else by the time the customer has a signed motion to incur debt.
In my experience it usually takes at least a month (but I have had it take as long as 6 months and as little as 2 weeks) to get a letter from 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 give you a purchase order and contract on a vehicle that is within the guidelines you wish to request with the court. You can give that info to your attorney to get the ball rolling. Call us, at 888.300.3502 or stop by. We will even give those documents to you without taking a credit application if you wish.
We work with many major lenders that are helping people get Chapter 13 auto loans for people just like you.
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