Going bankrupt when you have car finance like a lease or hire purchase agreement is complex. The finance is secured against your vehicle. This means bankruptcy does not automatically write it off.
Nevertheless, whether or not you will be able to keep your car depends on two factors. The first is its value relative to the balance of debt outstanding. The second is the attitude of your car finance company.
Use this guide to find out how your car will be affected and what your options are.
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Will the Official Receiver let you keep paying your car finance?
After you go bankrupt, the Official Receiver (OR) will review your car finance agreement. They will compare the second hand value of the vehicle with the total outstanding balance you have left to pay.
If the balance owing to the finance company is greater than the value of your car, the OR has no financial interest in it. This is because if you sell it, there would be nothing left after the finance company is paid. In these circumstances, the OR will normally be happy for you to keep your vehicle (as long as you can afford the ongoing payments).
Where your car finance is a lease agreement – for example PCP (personal contract purchase) – the amount you owe (including any balloon payment), will almost certainly be more than it is worth.
However, where the value of your car is more than the outstanding finance, the OR can demand that you sell your vehicle. You would then have to hand over the balance raised to them. This scenario is more likely to occur if you have a hire purchase agreement which has been running for a while.
Do you think the amount you owe to your car finance company is less than the value of your car? Speak to us about your options.
If your car finance payments are unreasonably high, you may still have to give up your vehicle even if the OR has no financial interest in it. Contact us for further advice.
How will your car finance company react if you go bankrupt?
Even where the Official Receiver allows you to keep your vehicle, the finance company itself can still demand that you hand it back to them. What happens will depend on their attitude to bankruptcy.
Most main stream car finance companies do not like it if you go bankrupt. Lenders such as Black Horse, BMW and Santander will all demand that you return your vehicle to them. This is regardless of whether you are up to date with your payments or not.
You are more likely to be able to keep your car if your finance agreement is with an alternative sub-prime lender. These include people like Car Finance 247 and Motonovo.
Generally speaking, sub-prime car finance companies do not have a problem if you go bankrupt as long as you maintain the ongoing monthly payments.
If you have a car on finance, always check with the lender about their policy before you go bankrupt. If you know your vehicle is likely to be repossessed, we can help you put a plan in place to manage this.
Does bankruptcy write off car finance debt?
The underlying principle with car finance (whether it be a lease agreement or hire purchase) is that it is secured on your vehicle. As such, your bankruptcy does not automatically write off this debt.
If both the Official Receiver and the finance company are in agreement, you will be able to keep your car and carry on paying for it as normal. You should include the appropriate amount to be able to do this in your living expenses budget.
However, what are your options if you can’t afford to maintain the payments or the vehicle is no longer required?
In these circumstances, you can decide to hand your vehicle back to the finance company yourself. You can do this either before you go bankrupt or afterwards. They will sell the vehicle and put the money raised towards the debt you owe.
If there is any debt outstanding (known as a shortfall), this is then unsecured. Because it’s unsecured, it is then added to your bankruptcy and written off.
Is it possible to get finance to buy a car during bankruptcy?
As with any form of borrowing, it is not usually possible to get a new car finance agreement in your name during the year you are bankrupt. This is primarily because you will fail the lender’s credit check.
If you know you are going to need a new vehicle, the best option is to sort out the finance agreement with a sub-prime lender before you go bankrupt. You will need to make sure you check with the lender what their policy would be if you do subsequently go bankrupt before signing up to anything.
The only viable option for getting a new car finance agreement while you remain bankrupt is if someone else (perhaps a family member or friend) takes out the agreement in their name.
Of course, you would need to make sure that you could afford the monthly repayments. You can transfer the funds monthly to whom ever took out the finance or even to the finance company direct.
Can you get car finance after you have gone bankrupt?
It is possible to start taking on new credit agreements after you are discharged from bankruptcy. A car finance agreement is no different.
However, it is important to realize that borrowing from a main stream lender will not be possible straight away.
Generally speaking you need to start building your credit rating back up first. You can start doing this by using a credit repair credit card from the likes of Capital One, Vanquis or Aqua. Using the card for small purchases and paying it off in full each month will build up your credit score and mean you avoid interest charges.
After you have started to build up your credit score, sub-prime car finance companies might start to consider lending to you. This could happen as early as 6-12 months after your bankruptcy ended. However there is no guarantee of this.
Written by James Falla
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