Bankruptcy is a legal process involving debt. An individual or a business can file for bankruptcy when they can no longer meet their financial obligations, most specifically paying back creditors for the debts that they owe. Bankruptcy provides relief, or an opportunity to restructure. The process discharges the debt, declaring that the debtor is no longer to be held liable for that debt. However, not every type of debt can be discharged through the bankruptcy process.
Although states have some say in their statutes regarding bankruptcy, the bankruptcy process is overall governed by the federal law known as the United States Bankruptcy Code. Under this code, there are several different chapters of bankruptcy that a person or business may file. This will be further discussed below; however, the most common chapters are Chapter 7, Chapter 11, and Chapter 13.
As previously mentioned, bankruptcy can address debt in a few different ways. The debt may be completely discharged, in which case the person filing for bankruptcy does not need to repay any debt, at all. Other forms of bankruptcy may restructure or reorganize the debt, so that the person or business filing for bankruptcy has a more manageable way to pay back their debt.
What Are the Different Types of Bankruptcy?
To reiterate, there are many different types of bankruptcy. However, the most common chapters of bankruptcy filed are Chapter 7, Chapter 11, and Chapter 13.
Chapter 7 bankruptcy is the most common type of bankruptcy. As it involves liquidation of a person’s assets, it is generally recommended for debtors with lower income but higher amounts of unsecured debt. Chapter 7 bankruptcy is viewed as a quick form of relief.
A bankruptcy court will determine how much the debtor is able to pay back their debts. This will involve tallying the value of the debtors possessions, and selling them off in order to help pay debts. Once the debtor has paid off as much of the debt as possible, Chapter 7 discharges most of the remaining consumer debt.
However, the process does not discharge some common debts, such as:
- Student loans;
- Child support or alimony payments;
- Debts owed to the government; and
- Personal injury debts.
Chapter 13 bankruptcy is the reorganization form of bankruptcy, and is generally for debtors who have higher incomes. These debtors also have property that they wish to be protected from creditors who may seek to levy those assets.
Chapter 13 allows the debtor to reorganize the debt in such a way that they can then make payments that they can afford. Some debts may be discharged through this process, while other debts are required to be paid in full within the timeframe of the bankruptcy payment plan. Some examples of the different factors that can impact how the debt is reorganized or restructured include:
- The kind of debt you want included in the bankruptcy;
- The type of relationship you and the creditor share regarding the debt;
- Your ability to pay off the amounts owed within a reasonable time period; and
- The bankruptcy judge’s final determinations regarding the debt.
Chapter 11 is a type of reorganization bankruptcy, and is available to individuals, corporations, and partnerships. As there are no limits on the amount of debt, it is the popular bankruptcy choice for large businesses who are seeking to restructure their debt in order to become profitable again.
Chapter 11 is considered to be the most flexible of all the bankruptcy chapters, which makes it generally more expensive to the debtor. It is important to note that the rate of successful reorganizations is generally very low.
Can I Get a Car Loan If I Have Filed For Bankruptcy?
It is especially important to note that, overall, bankruptcy has serious long term consequences for the debtor. Once the bankruptcy process is complete, it is very difficult to repair credit and obtain financing for necessary large purchases after filing for bankruptcy. However, it is not impossible to obtain a loan for something such as a car after filing for bankruptcy.
It will take a considerable amount of time. The debtor will need to reestablish their credit by making on-time and complete payments on any open accounts. As such, choosing an affordable vehicle is key in demonstrating your willingness to repair your credit and pay back the loan.
Something else to consider is that, ultimately, the chapter of bankruptcy filed for can affect the outcome of the car loan. A Chapter 13 bankruptcy may seem like it would be the best option in terms of helping reestablish credit faster, because the debtor is still paying off some debts as opposed to having them all discharged.
Alternatively, Chapter 7 provides a clean slate. As such, it could be easier for a person to make timely payments of new debt, such as an auto loan. Chapter 13 requires paying back as much as possible in a reorganized payment plan, making it difficult for someone with debts that became too much to handle. If the debtor were to still have trouble making their payments, they could have a hard time reestablishing new credit. This leads to a difficult time obtaining a new car loan.
What Are Some Other Pros and Cons to Filing For Bankruptcy?
Because bankruptcy is a process designed to provide relief to overwhelmed debtors, there are several advantages to consider. Some pros to filing for bankruptcy include, but may not be limited to:
- Filing for bankruptcy will trigger an “automatic stay,” which prevents creditors from taking action to collect their debts;
- An automatic stay also stops creditors from repossessing property such as cars and personal property, and prevents creditors from calling, suing, or sending letters;
- Filing for bankruptcy may halt evictions, foreclosures, wage garnishments, and utility shutoffs;
- After filing for bankruptcy, the debtor’s debt to income ratio will improve, which is a factor in determining credit worthiness;
- Access to financial counseling and the tools to better balance debt; and
- In a claim for bankruptcy, the debtor can retain certain assets and manage their payments in smaller sums.
As previously discussed when determining whether a debtor can get a car loan after filing for bankruptcy, there are many cons to consider before filing for bankruptcy. Although it is a form of financial relief, it is not without consequence. Some of the cons include, but may not be limited to:
- Debtors unable to exempt all of their personal property or real estate under the bankruptcy exemptions may have some of their property seized by the bankruptcy court and sold, in order to pay their creditors;
- Bankruptcy is noted on the debtor’s credit report for seven to ten years;
- It is common for credit card companies to automatically cancel credit cards when the debtor files for bankruptcy, leading to difficulty obtaining new credit cards or lines of credit; and
- Tax refunds from federal, state, or local governments may be in jeopardy or denied based on the bankruptcy.
Unfortunately, in many cases, the cons can outweigh the pros. That is why it is imperative that those considering bankruptcy take their time in making their decision.
Do I Need an Attorney For Assistance With Bankruptcy and Car Loans?
If you are considering filing for bankruptcy, or have filed for bankruptcy and find yourself needing to apply for a car loan, you should absolutely consult with a local and experienced bankruptcy attorney. An experienced bankruptcy attorney can help you determine your best legal options, as well as provide legal advice regarding how to best proceed. Finally, an attorney will also be able to represent you in court, as needed.