Bankruptcy and Auto Loans

Navigating the Terrain of Bankruptcy and Auto Loans

When financial turmoil hits, many Canadians resort to bankruptcy to alleviate their debt burden. As per the latest statistics, in 2021, a total of 47,924 insolvencies were filed, out of which 15,592 were bankruptcy cases.

However, declaring bankruptcy often leads to a financial dry spell, especially when it comes to acquiring loans. The shadow of bankruptcy lingers on your credit report for six years, affecting your ability to access loans at desirable rates. But does that spell doom for your chances of owning a car? The answer is a resounding no. This article sheds light on Bankruptcy and Auto Loans, and how you can navigate this difficult terrain.

Retaining Your Vehicle After Bankruptcy

Bankruptcy doesn’t necessarily mean losing all your possessions. Certain items are exempt from the grasp of bankruptcy, which may include your car, under certain conditions. If your vehicle’s worth aligns with a specific threshold, you may continue to own it. For instance, in Ontario, if your car’s value is $7,117 or less, it’s exempt from bankruptcy.

However, conditions may apply. For instance, you may need to demonstrate a legitimate need for the car. Consulting with a Licensed Insolvency Trustee (LIT) can provide clarity on these exemptions.

Securing a Car Loan Post Bankruptcy

Getting a car loan after bankruptcy is challenging but not impossible. Traditional lenders like banks might hesitate to lend to you, given your financial history. However, secured debts, such as auto loans, are more easily accessible.

Several private organizations and alternative lenders specialize in offering loans to individuals struggling with bad credit. Your best bet in securing an auto loan after bankruptcy is via:


  • Alternative lenders
  • Car dealerships


However, it’s essential to remember that loans from alternative lenders often come with higher interest rates and less favorable terms. The silver lining is that you can renegotiate these terms and consider refinancing during the loan term.

The Good and The Bad of Bankruptcy and Auto Loans

Acquiring a car loan after bankruptcy comes with its pros and cons.

Pro #1 – Credit Rebuilding

Post-bankruptcy, taking on another loan might seem counterintuitive. But if you can afford the repayments, a loan can serve as a powerful tool to rebuild your credit. Timely repayments reflect positively on your credit report.

Pro #2 – Ownership of an Asset

Unlike other loan types, an auto loan offers you ownership of an asset upon completion of the loan term. With a successfully completed auto loan, you end up owning a car.

Con #1 – Depreciation

While owning a car is a plus, it’s important to remember that cars are fast depreciating assets. They lose about 20% of their value within the first year and 40% after five years.

Con #2 – High Interest Rates

Lenders compensate for the risk of lending to someone with bad credit by charging higher interest rates. This means you’ll end up paying more over time, even if your monthly payments are small.

Con #3 – Increased Debt

Taking on more debt after bankruptcy can be risky. If your credit utilization ratio increases, it could further damage your credit score.

Preparation for an Auto Loan After Bankruptcy

Securing an auto loan after bankruptcy requires careful planning. Here are some tips:

A Larger Down Payment

If possible, save for a larger down payment. It not only reduces the risk for the lender but also results in lower monthly payments.

Credit Rebuilding

Before applying for a car loan, spend a few months or even a year rebuilding your credit. A slight improvement can enhance your chances of securing better loan terms.

Verify Your Credit Report

Ensure your credit report is accurate. Any inaccuracies could lower your credit score. If you find any errors, resolve them with the credit bureau before applying for a loan.

Compare Rates and Terms

Car dealerships often have ties with multiple lenders. As a borrower, you have a variety of loan types, rates, and terms to choose from. Shop around before committing to a lender.

Bankruptcy and Auto Loans can be a difficult pair to match. However, it’s not impossible. You might not get the best rates, but thorough research can help you leverage your negotiations with a lender.

Find Your Personal Debt Relief Solution

Licensed Insolvency Trustees are here to help. Get a free assessment of your options.

Discuss options to get out of debt with a trained & licensed debt relief professional.