Is Refinancing a Car Loan After Bankruptcy Possible? Everything You Need to Know


It’s a scary word describing someone in an unenviable financial position. But it’s not exactly a rarity. In 2021, there were 413,616 bankruptcy claims.

The word “bankrupt” stems from the Italian term “banca rotta,” which translates to “broken bench.” In 16th century Italy, money dealers worked from benches and tables. If funds ran dry and they went out of business, their benches would be broken in half. Fortunately, if you file for bankruptcy, no one’s going to come smash your furniture. But there could be some repercussions.  

One immediate drawback is the extensive damage bankruptcy can do to your credit. For auto loan borrowers, that means you could have a hard time qualifying if you want to refinance your car loan— but it’s not impossible.

Whether you’re on the fence about filing or you’re in the middle of court proceedings, let’s explore bankruptcy and how to approach refinancing afterward.

What Is Bankruptcy?

Whether you’re on the fence about filing or you’re in the middle of court proceedings, let’s explore bankruptcy and how to approach refinancing afterward.

Bankruptcy can help individuals or businesses climb out of major financial holes. When borrowers can’t repay their lenders, they have the option of filing for bankruptcy in a federal court. This legal process could result in the discharge of all or a portion of your debts, essentially setting you up for a fresh start.

There are six types or “chapters” of bankruptcy:

  • Chapter 7, also known as “liquidation,” results in the sale of nonexempt property in order to repay creditors.
  • Chapter 9 is for the reorganization of municipalities, which is very rarely used (fewer than 500 times since the 1930s) and irrelevant to drivers. 
  • Chapter 11 is often referred to as “reorganization” bankruptcy. Although individuals can file for chapter 11, this is the most complex and expensive form of bankruptcy, so it’s more commonly used by businesses.
  • Chapter 12 is reserved for family farmers and fishermen with regular income.
  • Chapter 13, which is also called “a wage earner’s plan,” allows for individuals with regular incomes to set up debt repayment plans.
  • Chapter 15 is the most recent addition to the U.S. bankruptcy code. This chapter was designed for cross-border insolvency cases, so it’s rare and likely irrelevant for the typical driver.

We’ll focus on the two most applicable bankruptcy chapters for auto loan borrowers: chapter 7 and chapter 13.

An Overview of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as “liquidation.” Despite the ominous title, the goal of bankruptcy law is to protect borrowers from crippling debt and help them get back on their feet.

Once you file for chapter 7, the government will assign a trustee to your case. They’re responsible for liquidating your nonexempt assets — such as second vehicles, vacation homes, and collectibles — and repaying your creditors with the proceeds.

On the other hand, some of your property is considered exempt under federal and state laws. These definitions vary, and borrowers may have the right to leverage their state’s definition of exempt property instead of the federal definition. For instance, the U.S. Bankruptcy Code allows a filer to exempt up to $2,400 of equity interest in one vehicle, while the state of Idaho bumps that limit up to $10,000.

However, bankruptcy does not remove liens on property. So, if you have a secured loan (like a car loan), the lender will still have a security interest in the underlying asset after bankruptcy, meaning they can repossess the car if you stop making payments.

Note that chapter 7 eligibility isn’t guaranteed — you have to qualify.

Can you refinance a car during chapter 7 bankruptcy?

Generally speaking, you’ll need the court’s approval to enter a new loan agreement during bankruptcy. It’s probably not worth applying for a refinance loan during legal proceedings though.

For starters, chapter 7 bankruptcy typically lasts between three and six months. Waiting could help you avoid going through the court system. Moreover, once you file for bankruptcy, it’s public record and accessible by the major credit bureaus (e.g., Experian, TransUnion, Equifax). In all likelihood, making it difficult to find a lender. 

An Overview of Chapter 13 Bankruptcy?

Chapter 13 can be a less drastic option compared to chapter 7, especially if you want to avoid liquidation. 

This type of bankruptcy enables you to set up a repayment plan for your debts, potentially at a discount. Plans are typically three to five years and effectively consolidate your payments — everything flows to the trustee, who then distributes the remitted funds to your creditors.

You may even be able to reduce your secured debts to the values of the underlying assets, a process known as a cramdown.

For instance, if your car is worth $10,000 but your loan amount is $15,000, you could cram down your obligation to $10,000 through your repayment plan. The remaining $5,000 would be lumped into the rest of your unsecured debt (like credit cards), of which the court may only mandate you to repay a portion back.

In either case, before you decide to pursue bankruptcy, it’s worth seeking legal counsel as bankruptcy cases are quite complex.

Can you refinance a car during chapter 13 bankruptcy?

Considering chapter 13 proceedings take longer, you might be wondering if you can refinance during bankruptcy.

The short answer is yes. But you face the same hurdles as before — the court has to approve your refinance loan. Your initial payment plan was approved according to your income and expenses when you filed. By refinancing, the court would likely reassess your financial situation, which could influence your monthly payments.

And, again, you still have to qualify, which is challenging with low credit.

Building blocks that spell out bankruptcy

How Bankruptcy Affects Your Ability to Refinance Your Car Loan

Contrary to what you might think, it’s possible to refinance your car loan after bankruptcy. That said, it’s an uphill climb and don’t be surprised if it takes months (or even years) to repair your creditworthiness.

Let’s explore the various ways a bankruptcy could affect your ability to refinance.

Credit score

Once debts are discharged through bankruptcy, they don’t just vanish. Chapter 7 bankruptcies stay on credit reports for ten years, while chapter 13 bankruptcies stay on credit reports for seven years. As you can imagine, bankruptcies tend to have a negative impact on a credit score.

The severity of the point drop depends on what your score was before you filed. If you have an above average score, expect your scores to plunge 200 to 240 points. If you have an average score like 680, your score could slip between 130 and 150 points. Regardless, loan underwriting programs will likely flag you as a risky borrower.


The very nature of lending money is risky — there’s always a chance that the borrower doesn’t repay. When a borrower has filed for bankruptcy, it demonstrates an inability to manage debt. That’s not very enticing to the typical lender. 

When you have a lower credit score or a negative credit history, you may not qualify for refinancing, at least through traditional financial institutions like banks or credit unions.

After filing for bankruptcy, it can be difficult to get the best auto loan rates. Lenders typically reserve their best rates for borrowers with excellent credit. However, you may qualify for a subprime loan with higher interest rates and a steeper monthly car payment. Granted that’s far from ideal, a refinance could still help you secure a better loan rate.

According to data from our sister company, RateGenius, 30% of borrowers with a bankruptcy on their record managed to successfully refinance — and they reduced their rate by 5% on average.

Regardless, it’s prudent to shop around and compare loan offers to potentially get a lower interest rate. You can use a marketplace like AUTOPAY to streamline this process.

Loan Fees

Subprime loans not only have high interest rates but also worse loan terms, such as documentation fees, prepayment penalties, and higher late fees. Keep an eye out for these terms when comparing loans, and tinker with a refinance calculator to ensure a new loan is worth it.

Copies of bankruptcy law

How To Improve Your Chances of Refinancing a Car After Bankruptcy

We’ll give it to you straight — you’ll have a hard time refinancing a car after bankruptcy. And considering it’ll remain on your credit report for 7 to 10 years, you might have trouble getting approved for any sort of loan for quite a while.

But there are steps you can take to improve your credit and chances of qualifying in the meantime.

Bolster your debt-to-income ratio

Your credit scores are an important factor, but they aren’t the only aspect of your financial profile. While your credit quantifies your reliability as a borrower, it doesn’t include your income.

So, in addition to your scores, lenders also evaluate your debt-to-income ratio (DTI). This metric compares your monthly obligations to your gross monthly earnings — essentially measuring the percentage of your income that’s already tied up in other financial commitments.

Generally speaking, it’s recommended to maintain a DTI below 50%. But the lower, the better.

According to data from our sister company, RateGenius, 90% of borrowers who were approved for refinancing had a DTI below 48% from 2015 to 2019. While it’s easier said than done, if you can swing a higher paying job or work part-time for a while, you can improve your DTI and potentially convince a lender to overlook the bankruptcy. 

Pay off a chunk of your existing car loan

Auto loans are considered secured loans. In other words, the vehicle serves as collateral, which means the lender could repossess it in the event the borrower stops making payments. The lender would then try to recover its investment by selling the vehicle. 

Why is this important? Well, the lower your loan balance relative to your car’s value (known as your loan-to-value ratio), the easier it is for a lender to make itself whole if they ever have to sell your car. This could help mitigate a lender’s concerns about your bankruptcy history and potential risk of missing payments.

Rebuild your credit

Although bankruptcy helps prevent you from suffocating under a pile of debt, it could put a stain on your credit, making it harder to take out loans and lines of credit in the future. That said, your scores aren’t locked in forever.

To rebuild credit, you need access to credit. Credit-builder loans and secured lines of credit can help. These products are easier to qualify for and help borrowers make on-time payments and establish accounts in good standing.

With good credit repair habits, your credit scores can gradually recover over time.

Consider a cosigner

Applying for a refinance loan with a cosigner can help you qualify. A cosigner promises to take responsibility for the loan if the primary borrower ever stops making payments. Ideally, this is a person who is not only trustworthy (like a parent or spouse) but also has a strong financial profile.

Don’t Rush, Understand Your Options

Bankruptcy is a viable solution for many financially distressed borrowers, but it isn’t the only option. It would be wise to explore alternative approaches to ensure you make the best decision. That may include speaking directly with loan providers to see if they’re willing to work with you, selling unnecessary assets, and asking friends or family for assistance.

You may even realize that you don’t need to go to court to rectify your situation, which can help preserve your credit and increase your chances of taking out new loans — including an auto refinance loan.

How Much Can Auto Loan Refinancing Save Me?

Car and home purchases are typically the largest purchases that most people will ever make. Because of the cost of the average home or new car, most consumers take out a loan to cover all or part of the cost. 

Although both types of loans can take a long time to pay off, car loan terms can range anywhere between 24 and 72 months — sometimes longer. These payments can be a drain on your finances.

If you are currently paying off an auto loan, car loan refinancing can help you save money over the length of your repayment period, in the form of lower monthly payments or both. How much money you save depends on several factors including your goals, current interest rates and your creditworthiness.

stick note with "refinance car" written on it

What Is Auto Refinancing?

Auto refinancing is the process of changing the terms of your current car loan. If your refinancing application is approved, your lender issues you a new loan that replaces the one you had. The differences are in the loan terms. 

For example, you could refinance at a time when interest rates are lower than what they were when you took out your original loan, or you could qualify for a lower interest rate based on an improvement in your financial situation or credit score. 

Over time, you’ll save money as you repay your balance at the lower rate. You might also be able to shorten or lengthen the amount of time over which you’ll need to make payments.

person using a calculator and notepad

Understanding Your Savings

When considering a car loan refinance, it’s important to determine what your goals are. If you are looking to reduce the amount of money you pay over the length of your loan, you’ll either want to reduce the interest rate that you were locked into when you first entered into the auto loan financing process, reduce the number of payments left on your loan (even if it means making higher monthly payments) or both.

On the other hand, if you are dealing with financial issues and need to free up some cash every month, you might want to refinance so that the length of your auto financing agreement is longer but with smaller payments each month.

If you don’t secure an interest deduction with this type of auto loan refinance, you might pay more over time than you would have with your original financing deal. However, since your payments are smaller, you’ll have more cash each month.

credit report with a 672 credit score

Factors That Influence Savings

The amount of money that you can save depends on multiple factors, including:

  1. Current interest rates: Current interest rates have a huge impact on the cost of your loan. If interest rates were high at the time that you signed your original contract, but have gone down since then, refinancing could save you money. However, if interest rates have gone up, it could end up costing you more money to refinance.
  1. Your financial profile: A financial profile includes several factors that affect the loan rate and terms that a lender offers you. Credit scores are a large part of this. If your credit score has improved since you were approved for your current loan, you might find that refinancing now could get you better terms. 

And although your credit does have an impact on loan approval and terms, it isn’t the only factor lenders take into consideration. Your debt-to-income ratio (DTI) and loan-to-value ratio (LTV) on your current car loan are also factored in during the approval process.

  1. Loan length: In many cases, the fewer payments you make, the more money you save over time. However, if you are refinancing to free up cash for your monthly budget, a longer loan term might provide you with lower monthly payments. 
  1. Lender fees: Lenders often charge fees when you apply for a loan, and sometimes your current lender will charge prepayment fees if you pay off your loan early. These fees vary, but you’ll want to check with the lenders and factor them in when you are calculating the cost of refinancing your vehicle.
  1. Car condition and mileage: Your car’s current condition and mileage also factor in when applying for an auto refinance. The better condition your car is in and the lower the mileage, the more likely you are to get better loan terms.

To get an idea of what you might be able to save, try using a refinance car loan calculator to determine what your savings and monthly payments might be. Be prepared to provide the balance left on your loan when you use one of these calculators.

Shop Around to Find the Best Auto Loan

Everyone is different, of course, so it’s worth it to do some research, run some numbers and check your options for refinancing. If you decide to apply for refinancing, make sure you shop around for lenders to find the best interest rate and loan terms. You might be able to save money long-term while also reducing your ongoing expenses.  

Thinking of Refinancing Your Car? 4 Tips to Improve Your Credit for an Even Lower Rate

Car loan refinancing can be a great way to reduce your monthly bills and save money as you pay off your car. A refinance loan is still a loan, however, so you’ll need to meet your lender’s requirements before you can be approved. 

Your chances of approval, as well as getting the most favorable loan terms, depend on several factors, but your credit score and history play a big role. 

Fortunately, there are many things that you can do to improve your credit before applying for auto refinancing. These include reviewing your credit reports and challenging errors, reducing your spending, keeping accounts open and not applying for new credit right before submitting your loan application.

credit report dispute form

1. Check Your Credit Reports

In a recent study on the accuracy of credit reports, one-third of study participants found errors on their reports. 

These errors could result in a denial of your auto financing loan application or an approval with less favorable terms, such as a higher interest rate. (This higher rate can cost you more money over time, and you can see how much by using a refinance car loan calculator.)

Fortunately, you have the right to check your credit reports and to dispute inaccurate information. All consumers are entitled to free annual credit reports and, in many cases, can request another free report under certain circumstances. 

It’s important to check your reports from all three major credit bureaus — TransUnion, Experian, Equifax — regularly, and particularly before you apply for car loan refinancing.

If you find errors, file disputes with the credit bureaus. Recheck your reports to confirm that your disputes were effective and that your credit history is accurate before beginning the refinancing process. Pay particular attention to the age of negative information on your credit reports. 

If the information is more than seven years old, you might be able to have it removed. Exceptions to the seven-year rule include bankruptcies, which can remain on your reports for up to 10 years, and judgments, which, as long as they are unpaid, can stay on your report until the statute of limitations expires.

On the other hand, if you find that the negative information on your reports is accurate, there might be things you can do to address the situation. If you can, pay off your balances. 

These accounts will update within a month or so, which might improve your credit score. You might also be able to work with creditors to settle your balances, which reduces your debt load but might negatively impact your credit score in other ways.

person using scissors to cut a credit card in half

2. Don’t Close Accounts

This can be a tricky one, particularly if you are very careful with your spending. Although it might seem reasonable to want to close credit accounts that you are no longer using, doing so can have a negative impact on your credit score. 

Credit scoring models consider several factors, including the age of your accounts as well as the amount of available credit that you are not using. Open accounts with low or no balances positively impact your credit. In addition, older accounts also impact your credit positively, as they show that you’ve been able to maintain an account for an extended period of time. 

3. Don’t Make Any Large Purchases

Because your available credit has a significant impact on your credit score, it is wise to forgo other large purchases before refinancing your car — unless, of course, you plan to pay for the purchase in cash. 

Taking out new or refi loans, or running up a large credit card bill, will affect your credit and reduce your chances of approval or getting a good rate.

4. Don’t Apply for Credit

Credit applications can result in what is known as a “hard pull” on your credit reports. This means that your credit history will show that you made a credit application. This can reduce your credit score. 

If auto loan refinancing is in your near future, refrain from applying for other credit products now. Even if you easily qualify for loans or credit cards, the inquiries, plus the opening of new accounts, can have a negative impact on your creditworthiness.

Be aware, however, that not all credit checks result in a hard pull or hard inquiry on your report. Some checks, also called “soft pulls,” are performed by utility companies, employers or banks that are considering you for a preapproval offer. 

These do not impact your credit score. If you are unsure about whether a business or organization is performing a hard or soft inquiry, ask before you consent to a credit check.

application form for a credit card

Take Steps to Improve Your Credit Today

Getting your credit in order before applying for a refinance loan doesn’t have to be incredibly complicated, but it can take time  — particularly if you must dispute information in your report or wait for your information to be updated. Planning ahead can be your best option for a successful auto loan refinance.

Can You Refinance a Car More Than Once?

Yes, you can refinance your car loan more than once. In fact, as long as you can find a lender to approve you for a loan, you can refinance as many times as you want. There are no laws or regulations against it. However, there are a few things to keep in mind before you decide to refinance your car loan again.

Why Refinancing Your Car Loan Could Save You Money

When you refinance your car loan, you are taking out a new loan, ideally with a lower interest rate and possibly with a different term. This could lower your monthly payment and save you money in interest over the life of the loan. It doesn’t change the initial purchase price of the vehicle, but when you do this multiple times, it’s possible to save even more money. 

Ensure It’s the Right Time to Refinance a Loan

Refinancing should make sense, so you want to be sure that it’s the right move for you before you sign on the dotted line. Here are a few things to consider:

  • Check your credit score – Your credit score is one of the most important factors that lenders take into account during the loan approval process. If your credit score has improved since you originally financed your car, you might be able to qualify for a better interest rate. However, if your credit score has dropped, you should hold off on refinancing until it improves.
  • Wait for interest rates to drop – Interest rates are constantly fluctuating, so it’s important to keep an eye on them. If rates have changed and gone down since you originally financed your car, it might be worth refinancing to get a lower rate and save money.
man on the phone while looking at his interest rate on the computer
  • Your car loan amortization schedule – If you have a simple interest loan and have limited time left on it, it might not make sense to refinance since you’ll have already paid off the majority of interest and be working on paying down the principal. However, if you’re locked into a high interest rate and still have a considerable amount of time left on your loan, it might be worth refinancing to save money in the long run.
  • Your financial situation – When you refinance, you can also change the length of your loan, which can lower your monthly payments. If you’re in a position where you need the financial relief of lower monthly payments, refinancing might be a good option for you. Conversely, if you have a higher income and are looking to clear up debt, you might want to consider a shorter loan term so you can pay off your car loan faster.

After you’ve considered all of the above, you’ll know if it’s the right time for you to refinance.

Consider the Fees

Each time you refinance, you’re taking out a new loan. That means you’ll have to pay any associated fees again. These costs can add up over time, so it’s important to factor them into your decision to refinance. Be sure to ask about any potential fees and compare them to other offers before you choose a new lender.

Additionally, some lenders might charge a prepayment penalty for refinancing. This fee is typically a percentage of your loan amount and is charged if you pay off your loan early.

woman using a calculator and her laptop

Finding a New Lender When You Refinance

When you’re ready to refinance your car loan, the first step is to shop around for a new lender. This could be a bank, credit union or online lender. 

There are a few things to keep in mind when you’re looking for a new lender:

  • Interest Rates – Be sure to compare interest rates from multiple lenders before you choose one. 
  • Fees – As mentioned above, fees can add up over time, so be sure to ask about them upfront. 
  • Reputation – Check out online reviews and Better Business Bureau ratings to get an idea of a lender’s reputation. 
  • Customer Service – Find out what the customer service is like before you commit to a lender. This can be especially important if you have questions or need assistance down the road.

Once you’ve checked into these factors, you’ll have the information you need to decide which lender is best for you.

Refinance to Save

You can refinance your car loan more than once, but be sure to do your homework first to make sure it makes financial sense for you. Start by using a refinance car loan calculator and then compare rates and fees from multiple lenders to find the best deal. Remember to factor in any associated costs so you can make an informed decision that’s right for your financial situation.