Bankruptcies that are not discharged or dismissed are still active, with personal finances under control of the federal bankruptcy court. Chapter 13, which is one of the two popular forms of bankruptcy, allows participants to take on additional credit such as a car loan -- with permission of the court. However, it is up to the borrower to find a lender willing to grant the loan. Some lenders specialize in lending to people with bad credit, including those who are in bankruptcy.
Regular banks and credit unions are highly unlikely to approve loans for people in bankruptcy. However, some car dealers boast they can arrange financing for any type of credit. This usually means applying for the car through the dealer, who then sends the application to several lenders who are comfortable lending to people in bankruptcy. The lenders are often referred to as "bankruptcy lenders."
The loans are usually a bad deal because of outrageous interest rates that can easily exceed 25 percent. The lenders feel exorbitant interest rates are justified because loaning money to people in bankruptcy represents a greater risk than lending to people with good credit scores. The car dealer also profits from the loan in many instances. In addition to possibly receiving a portion of the finance charges the dealer may offer to arrange financing only on cars that are overpriced. Thus the borrower, who already has credit problems, may end up overpaying for the car and the loan.
Dealers make loans to people in bankruptcy knowing they can repossess the car if necessary. Payments on unsecured debts in Chapter 13 bankruptcy are made directly to the lender outside of the court-ordered payment plan used to pay unsecured creditors such as credit cards. High-risk auto loans often include provisions allowing repossession after just one missed payment. The bankruptcy court will not stand in the way of automobile repossession during the bankruptcy.
The bankruptcy court understands that people completing Chapter 13 bankruptcy may need credit before the process is complete, and that is why requests for purchasing a car are sometimes granted. Chapter 13 requires a payment plan of three to five years, with permission needed from the court to add debt. Debtors asking to purchase a car are required to explain why they need the vehicle. Chapter 7 is also a popular form of bankruptcy but is very quick, lasting just a few months. As a result the court is unlikely to approve a request to take on more debt during a Chapter 7 bankruptcy.