Car Loans & Financial Wellness

What Is A Car Loan?

Whether it runs on petrol, diesel, or electric, or it’s a hybrid, a car is one of the most important things you can own.

For better or for worse, car manufacturers such as Volkswagen, Ford, and Nissan have impacted society and accelerated us to new technologies that will forever change the way we use transportation.

It is estimated that in 2020, there were almost 228.2 million licensed drivers in the United States alone. For many, a car is a must-have even when going through bankruptcy. Many people use a car to drive to work, others use it to transport their children to school, or some in recent years even live in their car.

However, despite the necessity of a car, not many people can afford one, and when they can’t, they often turn to car loans.

When we talk about a car loan, we’re usually talking about borrowing money, usually from a bank, a Credit Union, or some kind of lending institution to purchase a car, either all of the value of the car or 90 percent of the value of the car.

What Does Mean When A Car Loan Is “Secured With Collateral”?

Some loans are unsecured. Your credit cards, for example, are unsecured.

If you don’t pay your credit card bill, they’ll probably sue you, but they’re not going to take away anything from you, like your personal property.

When you have a car loan, that’s secured by collateral.

The collateral is the car, and if you don’t pay your car loan, then, the lending institution can come to take your car and can repossess the vehicle.

It gives them security, like they have their own little Linus security blanket in the car, so that’s what a secured by collateral phrase means.

How Much Money For A Loan Would You Obtain?

People can borrow money of all kinds of amounts, it depends on their earning capacity, it depends on what their borrowing capacity is, and what their credit looks like.

Usually, the people we’re seeing in our office have car loans for under 25,000 dollars, typically that’s on the high end, typically much less than that.

Sometimes, they get to our office underwater in their car, so their equity is low,the car is worth less than what they owe on loan because cars can lose value quickly.

Does A Car Loan Have To Be For Personal Use? Can A Business Obtain A Car Loan?

Businesses can obtain car loans, and they do it all the time. Individuals can take out a car loan for business use, or the business itself.

Oftentimes, if the business is taking out a car loan, the lending institution will ask the owner of the business for a personal guarantee on the car loan, so the loan is held by both, the business itself and the person who owns the business.

If I File For Bankruptcy, Could My Car Be Taken Away?

It depends. When you are filing a bankruptcy, your lawyer is going to work very hard to use the exemptions.

Some laws protect your property, and we want you to be able to keep a car.

It makes the most sense for society if you’re able to get to work if you’re able to get your kids to school and go buy groceries with your car. It’s a necessity in American life.

We try very hard to have you keep your car.

A situation where we might face a challenge in helping you keep your car is if you have a great deal of equity, we would say probably more than five thousand dollars in equity in your car.

We had a client a while back, and this client had a souped-up truck, it was a heck of a vehicle and it was his pride and joy.

He had purchased it when business was really good, and when we filed the bankruptcy, it was worth about fifty thousand dollars, and his loan was under twenty thousand, so he had some equity.

We could go into what happened with the car, and in his case, he was able to keep the car, but if you have a whole ton of equity we might have some other challenges, but we also have some other solutions for that.

The bottom line is if you file bankruptcy in all likelihood, you will be able to keep your car.

What Happens With My Car Loan When I File A Bankruptcy?

When you file for bankruptcy your lender is subject to the automatic stay, they are not allowed to say: Oh we’re scared. We’re gonna come take your car, or, we’re gonna fast forward  accelerate your loan.

They cannot do that because that violates the bankruptcy code. They might ask you to sign what’s called a reaffirmation agreement if you want to keep your car.

You have to keep making payments, it’s a new contract, it’s the same conditions, same terms, and same interest rate as your original contract.

This reaffirmation is signed after you file the petition, and then, it’s more secure because if you don’t sign it and you change your mind about keeping the car, you could give up your car voluntarily and get rid of any debt that you had on the car.

This reaffirmation agreement makes it, so you’re on the hook for that loan.

There is a rule in Chapter 7, and it’s called a cram-down.

Under the bankruptcy code, if you bought the car more than two and a half years ago, the loan was used to purchase the car, and you did this more than 910 days ago, then, what you can do is you can repay through your Chapter 13 plan, only the value of the car, not the contractual balance.

If your interest rate is particularly high, you can cram down the interest rate as well.

If you bought the car within two and a half years, you can still in Chapter 13 cram down the interest rate, just not the value.

There are some great things you can do to make your car more affordable if it’s a car you need and want in the future.

Otherwise, if you want to give up your car when you’re in your bankruptcy case, you absolutely can do that and not have to pay on the loan.

If the car is just old, falling, you’re having to put a lot of work into it, that’s another option for you in a bankruptcy case.

Does The Type Of Car Affect A Car Loan? Would A Car Type Affect Which Type Of Bankruptcy I Could File For?

The only impact that it would have on the car loan would be the price of the vehicle.

Electric vehicles are a little more expensive right now, hybrid vehicles are more expensive than your traditional gas or diesel cars.

There was a law passed at the federal level last month, and our understanding is that it’s going to provide some credits for purchasing electric vehicles for people who want to do that, so it could bring your loan down.

If you’re looking at getting a hybrid or an electric vehicle, you might want to do some research about what credits are available, so you’re not paying quite as much.

Generally speaking, just the price of the car will affect you and not the kind of loan or any loan that you would take out to buy the car.

Does Asking For A Car Loan Affect Your Credit Score?

Applying for credit does impact your credit score if it’s a hard inquiry.

If you are asking for many different credit cards, or you’re poking around and submitting many applications that can affect your credit score.

Having a car loan also impacts your credit score. On one hand, now you have more debt, so your debt-to-income ratio is going to be different than it was before.

On the other hand, it allows you to show responsible use of credit.

If you are paying on a car before and after bankruptcy, it is a good way to build credit, because you can show that you can pay on time, you can do it over months or years, and so that can improve your credit score, it cuts both ways.

Once you have filed bankruptcy, if you need to take out a loan after you file your bankruptcy (again, it’s different in Chapter 7 versus a Chapter 13) in Chapter 13, you’re in your bankruptcy for three to five years, and you need court approval to take out any kind of loan, car loan, home loan, credit card, whatever you need, the court must approve it first.

The Chapter 13 trustee in your area will always have a procedure for how to get approval.

It’s usually pretty easy, there are some parameters, like no 50,000 dollar vehicles but, they want you to be able to get to work, and having a car for that is important.

What Are The Pros & Cons Of Getting A Loan To Buy A Car?

Having a loan in and of itself is not horrible, it will impact your debt-to-income ratio, and no one really knows what that formula is as far as what the numbers correspond to for your Fico Score impacting your credit score, but it does impact it.

On the other hand,if you show responsible payments over time, then that can improve your credit score.

When people sign a reaffirmation agreement, if they’ve filed their bankruptcy and they want to keep their car and keep making payments, a reaffirmation agreement is a good way to force the creditor to report on time for good payments.

The con is that you’ve got debt, and it’s easier to go through life without a car loan than with one.

If you can pay off that debt sooner rather than later, that’s a good thing. You may want to watch for the interest rates of car loans.

Usually, if somebody has filed a bankruptcy case and then taken out a car loan, the interest rate is going to be high.

You can rebuild your credit and then refinance in a couple of years, but just know that that’s going to be one of the consequences of a bankruptcy case.

There is a type of loan that we try to warn people against, and that’s commonly called a Title Loan.

Let’s say you’ve paid off your car, you own it free and clear, but you run into some money trouble. What you can do is you can go to one of these Title Loan companies, and offer up your car as collateral.

What we have seen in bankruptcy practice, is that these Title Loan companies charge exorbitant interest rates, sometimes in the hundreds of percentage points, and it does more harm than good.

They will require five payments, six payments, whatever it happens to be.

Sometimes there’s a great big balloon payment at the very end that people don’t understand, or aren’t expecting, and the same rules apply.

If you don’t make these payments, then, they can come and take your car, and they will sell it at auction.

Those Title Loans are tricky. We would love to see people do away with those.

Can Banks Not Give You A Car Loan If They Know You Filed For Bankruptcy?

Banks can do whatever they want because they’re private companies, they can make their own rules, and they can deny you for sure.

If you have filed a Chapter 7, then, oftentimes you’ll get in the mail all kinds of offers to purchase cars from Capital One or Ally Bank, all kinds of places.

They know you filed for a bankruptcy case and they send you car loan offers.

The reason for this is that they know you cannot file another Chapter 7 for eight years, so you are on the hook for that payment, they are not afraid that you’re going to turn around and discharge this debt in a bankruptcy case, because you’re not allowed to.

That’s basically why they love to give car loans and credit card offers to people who have just filed a bankruptcy case, knowing that you’re on the hook for that debt for at least eight years.

What Chapter Of Bankruptcy Would Be Most Effective Against A Car Loan Debt?

Depending on what you want to do with that debt.

If you need to get rid of your car but you can’t afford to keep making payments on it, you have, for example, an old clunker that needs a new transmission but you still have a loan against it, either Chapter of bankruptcy, a 7 or 13, will work well to discharge that debt.

You just have to say: I’m giving up this car, I don’t want it anymore. Then, you don’t have to keep paying on that loan anymore.

Chapter 7 is fine if you have a good interest rate.

Chapter 13 you can cram down the interest rate, sometimes you can cram down the value and only pay the value, not the contractual balance.

In that situation, you can save a lot of money going through, say a three to five-year Chapter 13 bankruptcy case, and not pay exorbitant amounts on your car.

What Happens To My Car Insurance If I File For Bankruptcy?

You need car insurance, you can’t just have liability insurance.

Nothing happens really, you just keep making that monthly payment or that six-month payment and you stay insured and protected.