Can Bankruptcy Wipe Away an Auto Loan Deficiency?
If your vehicle has been repossessed and you have a deficit, you may not have to pay it off if it is included in your bankruptcy discharge.
Bankruptcy and auto loans
After repossessing the vehicle, you may find that you are still indebted to the lender. Typically, once a vehicle is repoed, it is prepared for auction and sold to pay off your loan balance. However, the proceeds from the sale of an auction are often not enough to pay off your entire loan balance and other costs incurred during the repossession process.
Storage and retrieval company fees are also included in your loan balance and can be difficult to repay. Your auto lender may require you to pay off the entire balance in one lump sum.
This balance remaining after the recovery is called the deficit balance. If you file for bankruptcy, the deficit balance may be wiped out. Your car loan balance, deficit balance, and other vehicle-related expenses can also be released in bankruptcy.
Other debts that can be discharged in bankruptcy include:
- Car accident claims
- Amounts due under rental contracts
- Overdue utility bills
- Medical bills
- Credit card balances
However, when you file for bankruptcy matters.
If you filed for bankruptcy after repossession, the deficit balance may be eligible for discharge. If you took out the auto loan during bankruptcy and then repossessed it, the deficit balance will likely not qualify for discharge and your bankruptcy could be jeopardized. If you are in Chapter 13 and have taken out a court-authorized car loan in the middle of bankruptcy, failure to repay the loan as agreed could result in bankruptcy rejection.
According to the legal site Nolo.com, only debts incurred before your Chapter 7 bankruptcy filing can be discharged. Be sure to talk to your court-appointed trustee about your options and what you may still be responsible for after discharge from bankruptcy, and the options you may have if you are in Chapter 13.
Getting a car loan after a discharge from bankruptcy
If your bankruptcy is discharged, it means you have successfully completed it! After a discharge, you no longer need to ask the court for permission to incur new debt, and hopefully your finances are in better shape than they were before bankruptcy.
However, your credit score can be worse for wear and tear. One of the more serious side effects of filing for bankruptcy is that it can hurt your credit for up to seven or ten years, depending on how you filed for bankruptcy. Chapter 13, the refund deposit, harms your credit for up to seven years from the date of your deposit. Chapter 7, liquidation bankruptcy, stays on your credit reports for up to 10 years, also beginning on the day you file.
Many traditional auto lenders may not be able to help you with financing your vehicle because your credit score cannot meet requirements due to bankruptcy which lowers your credit score. If your credit score is below 660, you might have a hard time meeting the requirements for getting a car loan approval. However, subprime lenders can help many bankrupt borrowers despite having a bad credit rating.
While bankruptcy can haunt your credit reports for years to come, you would be happy to know that there are many lenders ready to help borrowers whose bankruptcy has just been released. Many bankrupt borrowers come out of bankruptcy with less debt and cleaner credit reports (aside from listed bankruptcy). While your credit score doesn’t seem too hot, you may be able to work with subprime lenders for your next car loan if you can meet the requirements.
Ready to take out an auto loan after bankruptcy?
Finding bankrupt auto lenders may not be as easy as finding a traditional lender like a bank or a credit union. Subprime lenders are registered with special finance dealers, and we want to help you find them.
Auto Express Credit has built a nationwide dealer network over the past 20 years, and we match borrowers with unique credit circumstances for free. Get started on your way to an auto loan by completing our free auto loan application form.