Question: In 2009, I filed for bankruptcy. Currently, I have several open credit cards that I pay on time. If I consolidate my credit card debt, would it affect me in the process of purchasing a car?
— Lorena in France
Howard Dvorkin CPA answers…
In the three short sentences you wrote, Lorena, there’s a lot to deconstruct. So let’s dive right in…
There are several kinds of Bankruptcy, and each has different rules and consequences. For instance, Chapter 7 bankruptcy, often called “straight bankruptcy,” eliminates unsecured debt when you give up you assets. That kind of bankruptcy stays on your credit report for 10 years.
Meanwhile, a Chapter 13 bankruptcy (which involves a repayment plan) stays on your credit report for only seven years.
Why is this important? Well, if you’re trying to buy a car, and your Chapter 7 bankruptcy was in 2009, it’s still on your credit report — and lenders will see it. However, if you filed for Chapter 13, it’s now eight years later, and has disappeared from view.
This is crucial because lenders “pull” your credit report before giving you money. If you’re buying a car and seeking an auto loan, a bankruptcy will make the terms of that loan more expensive for you.
OK, so that’s how bankruptcy can affect your impending car purchase. The second half of your question is about credit card consolidation. Here again, there are several possibilities. In other words, when you talk about “consolidating my credit card debt,” that topic has several possible tactics within it.
For example, you can get what’s called a “personal debt consolidation loan.” You do this through a bank or credit union or an online lender. Yes, you’re taking out a loan, but the interest rates will be significantly lower than what you’re paying on your credit cards. You use this new loan to pay off the credit cards, then you pay back the consolidation loan.
Of course, the only way to get a low interest rate is to have a high credit score. If you declared bankruptcy in 2009 and it’s still on your credit report, this option isn’t likely to work.
A better option in your case, Lorena, might be a debt management program. Known by the initials DMP, these programs are available through nonprofit credit counseling agencies.
The advantage to a DMP is that it’s set up in conjunction with a credit counselor who reviews all your debt-relief options. If a DMP is right for you, your total monthly payments can be reduced by 30 to 50 percent.
While it can take 36 to 60 payments to pay off the debt, you can actually build good credit during the process — which makes buying a car a little cheaper.
While you didn’t ask, let me suggest another course of action for you, Lorena: Buy a cheap used car you can afford with cash on hand. Sure, it won’t be a vehicle that impresses your friends. It will, quite frankly, be old and ugly. However, it’s only temporary, and if it last long enough for you to get clear of your bankruptcy and a good distance into a DMP, you’ll be able to reward yourself with a nicer vehicle in just a little while.
Consider it, Lorena.
Have a debt question?
Email your question to [email protected] and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.