In general terms there are two kinds of bankruptcy and individual or couple can file for. They are chapter 7 and chapter 13. If you file for chapter 7 all of your debts are discharged under the bankruptcy guidelines and you are no longer liable for that debt. The creditor will write the loss off and report it to the credit bureaus accordingly. If you file for chapter 13 you enter into a repayment plan approved by the bankruptcy court that repays all of your creditors over a specific time period usually three to six years. The court will schedule a meeting of the creditors and assign a trustee to your case. Agreements are made with each individual creditor as to how much they will accept each month as repayment based on what you can afford. You in turn will make one lump payment to the trustee every month and the trustee will disburse the agreed upon amounts to each creditor monthly. When your payment plan is complete your bankruptcy will be discharged. Common sense would tell you that it would be easier to get approved for auto loans if you entered into the chapter 13 option because you are actually repaying the debt not just wiping it out as with the chapter 7 option. This unfortunately is not the case, most sub prime lenders shy away from an applicant that has an open chapter 13 on their credit report. The reason for this is that the individual can add any new debt they incur to the chapter 13 payment plan and the lender has to wait in line to get paid back or will be paid much less monthly than the original contract stated. There are however some sub prime lenders that will approve you if you are currently in a chapter 13 bankruptcy plan here are some ideas to help you get approved and make the process go smoother.
1) Find out ahead of time if lenders guidelines allow for chapter 13- Some sub prime lenders guidelines will not allow for a chapter 13 under any circumstances. Talk the lender or lenders your are dealing with and ask them what their guidelines are when it comes to a chapter 13. If they don’t allow for it there is no reason to even apply with them, all it will do is put another inquire on your credit report and to many inquires will lower your credit score. Move on and find a lender that does allow for open chapter 13 bankruptcy filings. Spend some extra time on the phone inquiring with different lenders; this will save you a lot of headaches and aggravation during this process.
2) Get approval letter from the trustee- The bankruptcy protection laws will not allow any lender to enter into an installment agreement with you without approval from your trustee. This letter will need to be requested in writing by both you and the lender you are applying with. The letter will simply state that the trustee does not have any objection to you entering into or acquiring any new debt. If you just started your repayment plan or are behind on your monthly payments to the trustee chances are they will not supply this for you. This would be an indicator that you are struggling with the debt you already have and cannot afford to add any additional debt at this time. When you get current or demonstrate good payment history to the repayment plan you can request that the trustee reconsider.
By doing your due diligence on the phone ahead of time and having your approval letter from the trustee in hand you will greatly increase your chances for approval on auto loans. Take the time to gather your recent pay stubs, recent phone bill, and make copies. Have them neatly packaged with your trustee approval letter and present them to the loan officer.
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