Open BK- Chapter 13 steps to a Car loan


Bankruptcy courts are swamped with people trying to keep their car or get a NEW car loan with an OPEN BK-Chapter 13 Bankruptcy.

Many people do not understand the difference between a Chapter 7 and Chapter 13, when it comes to cars. The simplest way to explain the difference is, you either can afford to keep your existing car at the current payment, your attorney can TRY to get the monthly payment reduced by the bank, the bank says NO to the revised payment offer and they repossess the car, and now you need another car.

However, the Chapter 13 Bankruptcy means you are on a court-approved re- payment plan, and any major purchase, like a car, must be approved by the Judge.

Here is the MYCARLADY  13 simple steps, well simple but still work, to getting the court and the bank to approve a car loan. This is often called second-chance financing, but actually, this process is much harder and more time consuming than a second chance loan, because the Chapter 13 Trustee and Bankruptcy judge are involved.

The CAR LOAN for an Open Chapter 13 Bankruptcy process works like this…

  • 1.    Find a reputable dealer/broker/car buying service that will work with you throughout the process.
  • 2.     Determine the maximum budget the household can support as a car payment.
  • 3.     Determine how much cash down-payment is available, without raising the interest of the trustee/judge, that you have been withholding income from your creditors.  (The down-payment money can come from family members as gifts, i.e. X-mas, b-day)
  • 4.    The dealer then determines which vehicles are eligible for a bank loan based on the cash down and the monthly payment at an interest rate of typically 24.95% (in some states the maximum allowed for usury is 21.95%)
  • 5.     The key factors determining the car submitted for bank policy and trustee/court approval are: a car less than 5 years old and having no more than 60k miles.  The bank will charge a special fee for accepting this type of risk; however that fee come out of the dealer’s profit as a portion of the value of the car.
  • 6.      Once a suitable vehicle is found, the dealer prints a vehicle purchase order with the information on the buyer (you) and the car.
  • 7.      A copy goes with the prospective client, and one is faxed over to the attorney or trustee for the Chapter 13 buyer.
  • 8.      Some Bankruptcy attorney’s will charge the client an additional fee for submitting this document, but really, they are getting a fee for the Chapter 13 process, so it shouldn’t be extra.
  • 9.       The trustee will review the documents and the case file, and submit their “opinion” to the bankruptcy judge.
  • 10.     The decision to approve the vehicle purchase, offer a condition or determination other than that of the car submitted. As in, less car    payment, could take up to two months, in today’s heavy court calendar.
  • 11.     Once the trustee mails or faxes the court decision to the client’s attorney, the individual returns to the dealership to secure a car. The actual car submitted is usually long since sold; however, the approval is all the bank needs to make a loan on a like and kind vehicle, as long as the circumstances and purchase details have not changed significantly.
  • 12.     The bank offering the car loan will submit the loan information to the court, for their records.
  • 13.     The bank will also submit the loan payment history to the credit reporting agencies, which helps to get you started back on the road to credit recovery.

IMPORTANT things to note.  
1.     This is a very high interest loan, so 75% of the monthly payment in the first 18 mos. goes mostly to interest and very little to the principal balance of the car,  so you don’t want to buy an expensive vehicle, even if you put a bunch of money down.  Most expensive vehicles depreciate faster than middle of the ”price” road cars or those with big rebates, so pick something you can live with for at least 18 mos.- 2 years.  Save the fancy cars until your credit is AAA and you can lease.
2.      Pick a car/truck you won’t outgrow or get bored with, and maintain it.  add a warranty into the cost of the car because it makes the bank more comfortable with the loan, knowing you can afford to get the car fixed if something happens and you won’t default because your car broke down.   Save as much additional cash as you can while making this payment, and be ready to trade out or refinance at a lower interest rate once your Chapter 13 is over.
3.       Don’t get picky on color or features, and don’t spend money on fancy aftermarket “stuff”, to dress up your ride.  This won’t make it more valuable, except to thieves, and you will get no trade in or loan value when it comes time to move on.
4.      IF you haven’t gone down the Bankruptcy 7 or 13 yet, call me first: 702-788-3868 or email me at

I may be able to help you with the car part of the equation before you get messed-up by following bad advice or listening to an attorney who doesn’t know all the nuances of the car business. Most of my attorney friends send their clients to me BEFORE they file so we can figure out what to do about the cars BEFORE it’s too late or you make a mistake.

Sarah Lee is an automotive writer, personal car concierge and commercial fleet manager. If you need free advice on your car problem, question, issue, contact her at for a confidential conversation.
She has over 22+ years of experience. She writes about Cars, and is a staunch consumer advocate on car related subjects.
MyCarlady offers private, auto-related services to help you maintain your personal or commercial vehicles. Call Sarah Lee for more information: 702-521-7546


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August 2011
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