Bankruptcy is a legal process that people undergo, often as a last resort when they cannot meet their debt obligations. The process relieves the borrower from their eligible debts and allows for a fresh start; however, while bankruptcy doesn’t bar you from borrowing again, it certainly limits the lenders and loans that you have access to.
Bankruptcies made up 35% of all Canadian insolvency filings in 2020, while consumer proposals made up the remaining 6%5. There are many reasons for financial difficulty that can result in bankruptcy. The most common reason for financial difficulty in Canada is the loss of income. This is especially true now with the COVID-19 pandemic since many Canadians experienced job loss. We can see from the approximate 25% increase in Canadian bankruptcies just in March 2021 from February 2021.
How Bankruptcy Affects You
While bankruptcy is a scary thought for many, it’s sometimes necessary and provides people with much-needed relief from debt. Bankruptcy does negatively affect your credit, however, and limits you in a few ways financially. Here are some pros and cons of filing for bankruptcy:
Pros:
- Fresh start
- Forgiven debt obligations forgiven
- Ceased debt collection calls
- Protected from wage garnishment and court actions
- Possibility for bankruptcy discharged in as few as 9 months
Cons:
- A negative mark on credit score for at least six years
- Non-exempt assets must be liquidated to pay your creditors
- Bankruptcy filings are public record
- Limited access to loan products and subject to higher interest rates
So, filing for bankruptcy is certainly not a decision that you should make lightly. Despite the negative implications regarding future borrowing ability and your credit score, the good news is that you can still access loan products, including car loans, post-bankruptcy.
Can I get a car loan after bankruptcy?
Although credit bureaus wait at least 6 years before removing the bankruptcy mark of your credit report, it’s still possible to obtain a car loan before then. The reality is that banks aren’t likely to approve car loans for people who have filed for bankruptcy, because it usually means they have bad credit.
In many scenarios, one is discharged from bankruptcy after nine months. But, banks are even weary to approve a car loan shortly after you’ve been discharged from bankruptcy because your credit score will still be low.
Luckily, there are alternative lenders, including some car dealerships themselves, that will offer financing to people who have filed for bankruptcy.
What’s the Catch? Alternative lenders aren’t blind to the assumed risk associated with lending to someone who has declared bankruptcy. Expect to pay a higher monthly payment due to higher interest rates and fees, and be prepared to put up security, or collateral, for your car loan. In many cases, car loans differ from traditional loans in the way that the car itself can actually act as collateral.
Steps to Take Before Applying for a Car Loan
Rebuild Your Credit
If you have a bit of time to spare before you apply for your car loan, try to improve your credit. Even if you don’t have good credit now, you can take steps to slowly improve it.
Monitor Your Credit Score
Both TransUnion and Equifax offer credit monitoring services, which allow you to view your credit report regularly. Credit bureaus aren’t immune from error – that’s why credit monitoring is important, as it can help you catch errors that may impact your credit rating. Sometimes credit bureaus forget to acknowledge debts that have been paid on your credit report. In some rarer cases, credit bureaus might put someone else’s debt history on your credit report if your names are similar!
Use Credit Building Products
Some financial institutions like KOHO offer specific credit-building products to make it easy to rebuild your credit. Another way to improve your credit is to apply for a secured credit card. Since secured credit cards require your own money to act as collateral, they offer an opportunity to create positive credit history without risking more debt. And, secured credit cards are easier to obtain than unsecured credit cards if you have bad credit since you have collateral.
Make Your Minimum Payments
Now that you’ve declared bankruptcy, it’s especially important to avoid falling deeper into bad credit. Set alarms or reminders on the days your payments are due, curb your spending, and avoid the temptation of increasing your credit limit – do whatever you need to do to ensure you make all of your monthly minimum payments on time.
Compare Car Loan Providers
Banks aren’t the only ones who offer car loans. There are plenty of alternative lenders and dealerships that offer financing on a new car. Before you buy a car, compare the interest rates and loan terms across lenders, and don’t be afraid to negotiate. Negotiation often requires a bit of confidence and initiative, but knowing what the market is like and what competitors are offering is usually enough to begin a negotiation conversation.
Save for a Bigger Down payment
When reviewing your loan application, lenders usually want to see something to help make up for your poor credit score after you declare bankruptcy. 20% is a standard down payment amount for a car loan. Some lenders will offer financing with 5% or sometimes even 0% down, but that will cost you higher interest rates. A bigger down payment lessens the risk a lender assumes in lending to you. It can also increase your chances of securing an auto loan, and securing more favourable interest rates.
Final Thoughts
Bankruptcy comes with a few financial challenges, but those challenges are manageable. Despite higher interest rates and limited loan options, people who declare bankruptcy can still obtain car loans. Additionally, bankruptcy doesn’t last forever. Your credit report will keep the bankruptcy mark for six years, during which you can start rebuilding your credit. If you’re struggling to meet your debt obligations and are considering bankruptcy or a consumer proposal, contact us to explore debt relief options today!
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