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Financing Customers with Pre-Discharge Bankruptcies

February 2009, F&I and Showroom - Feature

by Rob Hagen

Dealers are looking everywhere they can to find profits to boost their bottom lines and return to profitability, and special finance is going to play a huge part in achieving that goal. With the limited number of funding sources, booking deals for credit-challenged customers has become harder, even as that sector continues

to grow. To really ramp up sales, experienced special finance managers get good at selling to “niche” markets. One such market that has been a source of profits for many dealers is customers who have recently filed for bankruptcy.

Bankruptcies have always been a fundamental part of any well-run special finance department, but most dealers tend to wait until a customer’s bankruptcy has been discharged — that is, their debts have been cleared — before they’ll make a move. One way to gain market share is to work with “pre-discharge” customers who are still in the process of Chapter 7 bankruptcy.

Going after this market requires a little extra work, but it pays off in the margins. Grosses, for instance, are much higher due to the fact you don’t have to worry about negative equity from trade-ins. But to do it right, a special finance manager will first need to learn how bankruptcies work.

Bankruptcy basics

Dealers who work with pre-discharge buyers often have to take on two roles: credit counselor and dealmaker. That requires extensive knowledge of how bankruptcies work. For starters, let’s define the two main forms of individual bankruptcy protection:

Chapter 7: This is the most common form of bankruptcy for individuals. Often referred to as a ‘liquidation,’ the debtor’s non-exempt property — the guidelines for which vary from state to state — goes toward repaying his or her creditors, after which most remaining debts are discharged, typically within 90 to 120 days. Certain debts such as income and property tax, child support and student loans typically cannot be discharged.

Chapter 13: This less-common filing is, on the surface, somewhat more like debt consolidation. An income-earning individual can file for protection under Chapter 13 and set up a plan to repay his or her creditors, typically over a period of three to five years.

The Administrative Office of the United States Courts reports that bankruptcy filings and discharges are escalating. 101,753 American households filed or discharged a bankruptcy between Jan. 1–23, 2009, compared to 78,278 during the same period in 2008.

“The good news is that franchise dealers are working with lenders like Tidewater, CapOne, AmeriCredit, Wachovia and many others to offer loans to these individuals,” says Robert Davies, president of “It’s a win-win situation. Families are buying quality automobiles while re-establishing their credit with firms that report to the credit bureaus.”

The numbers project to at least 101,753 bankruptcy cases filed in January 2009, including 52,207 discharged Chapter 7s and 13s, a 20 percent increase from 2008. Chapter 7s accounted for more than 70 percent of all bankruptcies. As of January 6, 2009, there were nearly 1 million open bankruptcies being processed for discharge in the U.S.


When it comes to their vehicles, filers often don’t know what they should do. They need their cars and they fear they’ll never be approved for another purchase. This may lead them to reaffirm outstanding debt on a vehicle that may have mechanical problems or they owe way too much on. For that reason alone, special finance managers who want to tap into the bankruptcy market must also take on a third role: marketing expert.

Marketing to the pre-discharge customer

Ideally, your first mailer will reach a pre-discharge customer within a few days of his or her filing. With a lot of other matters to cover, bankruptcy attorneys aren’t always able to convey all the pertinent information an individual needs to decide how to handle their vehicle situation.

You want to get them on the phone as close to the filing date as possible.

“Getting on these customers early and often is the key to advertising to the bankruptcy customers,” says J.P. Miller Jr., vice president of Paul Miller Ford Mazda in Lexington, Ky. “We start to send mail to them starting the day after filing and continue till discharge. It pays huge dividends for us as we average much higher grosses on these customers.”

Auto retail veteran Tom Martin agrees. He spent 10 years working with bankruptcy customers — at one point mailing 10,000 to 15,000 letters each month for a single Ford dealership in Ohio. He then founded Columbus, Ohio-based ACH Consulting LLC, a consulting firm that specializes in helping auto dealers start their own dedicated bankruptcy departments.

“The latest phase of this business has gone to the ’Net,” Martin says. “We’re trying to lead customers to a Website that will capture their information. We send out a mailer called The Top 5 Things Your Attorney Did Not Tell You. They log onto our site and submit their names, phone numbers and e-mail addresses before they can continue. Then we take their e-mails and put them into a series of auto responders to keep us in front of customers.”

Another part of Martin’s marketing plan is to get to know bankruptcy attorneys.

“Attorneys have been one of my best sources for leads throughout the years,” he says. “I have even done credit-building seminars for several attorneys’ clients so they could understand how to build their credit the right way.”

A sympathetic ear

In the counselor role, a special finance manager must be willing to get to the bottom of each customer’s credit situation. Bankruptcies, more than any other form of negative credit, are influenced by outside factors. Whether it’s an unexpected medical expense, job loss or divorce, many of your pre-discharge customers never planned to file for bankruptcy — they just ran out of options.

In 1993, one of the first special finance customers I ever worked with walked into my office with a perfect credit bureau report … except for a Chapter 7 bankruptcy. Everything else was paid on time, and I had to ask what led to the filing. He and his wife explained that their daughter was born with a hole in her heart and they had racked up $500,000 in medical bills almost overnight. They tried to work out some kind of settlement, but the hospital was preparing to sue them and they had to seek protection.

Every time I start to get frustrated by the job, I remember how I helped those people and how grateful they were. There are a lot of people who have to file bankruptcy for similar reasons. They’re not all deadbeats or career debtors, and a good special finance manager will be ready with a sympathetic ear. Remember that these customers are under a lot of stress and can lose sight of their goals.

“Whenever I hire someone for a bankruptcy department, I look for a person who is not a car person, and I typically prefer to hire ladies,” Tom Martin says. “I find that women are more willing and able to gain the trust of customers in bankruptcy.”

Cindy Christianson, general manager of Herbie’s Auto Sales in Greeley, Colo., agrees.

“We have one lady who only handles our bankruptcies,” Christianson says. “She pulls fresh filings every day and starts sending the first of our four letters to them. Then she handles all the incoming phone calls and helps calm the customers’ nerves.”

Specialty lenders

The last part of the equation is having lenders that will approve these customers. Just about every subprime lender has programs for recently discharged customers, but far fewer are equipped to handle a pre-discharge.

Virginia Beach, Va.-based Tidewater Motor Credit has been financing pre-discharge customers for many years. The performance of those loans over time has justified their focus on that market.

“We are still buying open Chapter 7s and discharged BKs,” says Dedra Muffley, Tidewater’s marketing supervisor. “In fact, the open BKs represented the majority of our business last month. In this critical time, it became necessary for all of us to re-evaluate how we are operating and become as efficient and effective as possible. During this evaluation, we had to make some painful decisions regarding staffing and dealer clients.

“We confirmed for ourselves that lending to those people whose credit problems are behind them is what makes the best business sense for us and what pays out better. Generally, we are still buying those customers in the same way.”

When asked if that strategy will hold up through what promises to be a difficult year, Muffley is adamant.

“We absolutely expect this to be the bread and butter for ’09,” she says, “and we hope that those slices become loaves as we are able to add more dealers little by little. We remain hopeful that in the coming months, we will once again have a ‘green light’ as far as growth is concerned.”

Due to an expanding market for dealers and high profitability for lenders, bankruptcy business is sure to be an area that grows faster than other areas of the special finance business as it rebounds from a shaky 2008.

Rob Hagen is the founder of, a Houston-based consulting firm specializing in department setup and growth. E-mail Rob at


  1. 1. Jodi [ March 30, 2015 @ 06:30PM ]

    Trying to find a lender for a loan for a new pontoon boat. About to be discharged from bankruptcy and tryingto find a lender for a loan. Have a great job and with joint income 153,000 a year

  2. 2. youhavetobekiddingme [ April 01, 2015 @ 02:26PM ]

    Obviously going through the bankruptcy did not help you in learning how to manage money and avoid using credit to finance a lifestyle. If you have sufficient income, you should save your money and when you responsibly obtain the money required to purchase said pontoon boat you can purchase it.

  3. 3. Einstein [ May 22, 2015 @ 01:39PM ]

    U make that much went bankrupt and first thing u want is a pontoon boat haha some people never learn

  4. 4. Touche [ August 04, 2015 @ 09:00AM ]

    One word "priorities" We make it very clear to our customers that we are only interested in helping people that want to help themselves. Clearly this would not be a good candidate.

  5. 5. Mickey [ August 24, 2015 @ 10:05AM ]

    I am a single mother of 4 that recently filed bankruptcy. I am a little hesitant about getting another vehicle because of what happened with my last one. But I filed so that I can start over and buy a house in 2 years. I am gonna be a lot more careful when it comes to my credit now.

  6. 6. Mickey [ August 24, 2015 @ 10:05AM ]

    I am a single mother of 4 that recently filed bankruptcy. I am a little hesitant about getting another vehicle because of what happened with my last one. But I filed so that I can start over and buy a house in 2 years. I am gonna be a lot more careful when it comes to my credit now.

  7. 7. Richard M. Duibois [ September 17, 2015 @ 09:24AM ]

    I have been offered a high salary position with ConocoPhillips US Limited in Anchorage, Alaska. Being an expatriate I have to obtain insurance from Washington Insurance. I need funds now in order to obtain proper insurance and be able to be formally hired. I am working with Benton Law Office in Houston and this firm will arrange coverage for me once they receive required funds. I can submit to you job offer with salary and benefits to satisfy you on authenticity. The loan request is for 2000 and repayment will be made in short order as I will be reimbursed prior to travel. Thank you.

  8. 8. Meg Saundres [ November 01, 2015 @ 11:04AM ]

    Disharged as of April,2015. Have to wait little under 2 yrs. for loan approval through my bank and most loan companies. Car is on it's last leg and less costly recourse is to lease for at least those 2 yrs. Realistically, and in light of above article, what is the best I should see in a lease deal. Need car soon, don't have much for down payment but do work, responsibly, full time. Can afford approx. 100-150/mo car payment. Credit score of approx. 693, with bankruptcy. Has always been close to 800. Home owner in same home over 10 years.

  9. 9. dave [ June 02, 2016 @ 10:54PM ]

    Question regarding attempting to obtain an auto loan in CH13 (not yet attempted)
    We are 4 months away from completing our CH 13 Plan and receive our discharge. We were able to keep all of our assets and have made our payments on time as promised per schedule, and paid off two vehicles during the process.
    A few years ago I was involved in an accident and my vehicle was totaled, insurance covered a portion but I was forced to go to a buy here pay here car lot to purchase a not so dependable vehicle just to get by.

    This week my wife was in an auto accident and our dependable car was totaled and we find ourselves in the same situation again. (this car is paid off and still had many years of life yet so we were not looking to replace it anytime soon). We find ourselves in need of a dependable vehicle and our insurance company obviously wont pay for a rental through the remaining months of our discharge.
    We really don't want a new vehicle, so I am very opposed to going to one of the chain dealers our attorney recommended (offering special financing-without the trustee letter) and of course there is a fee for the attorney to review our current financial situation again to amend our ch 13 (with a few months left in the current plan) to get the approval letter for the replacement vehicle. (I travel weekly in my new career and time is against us.

    A little background on the situation; Our chapter 13 filing was the result of a corporate layoff with an uncertain future but i went in with excellent credit.
    (I often think that I acted in haste during those uncertain times but we were very uncertain that I would be able to find a new place of employ at the same level, or that we would be able to keep up with our liabilities.)
    We have recovered from the layoff and I started a new career a few years ago. Our credit score is 705 currently. We are in a good position financially with a net worth just south of $500k. We have worked very hard to keep it together after the restruct

  10. 10. David [ July 13, 2016 @ 02:45PM ]

    I am in a pre bankruptcy.I was turned down by Tidewater and one other plus four dealerships, believe me it is best to weight. You don't need a lot of credit inquiries on your credit report.

  11. 11. Aaron wade [ August 31, 2016 @ 11:40AM ]

    I filed chapter 7 bankruptcy do because I lost my job and now I have been working for year 40 hours a week making $123 every two weeks my car broke down and try to finance one before I get my discharge you said I can't do anything until I got it will it be easier for me to get a car loan after my bankruptcy discharge

  12. 12. Aaron wade [ August 31, 2016 @ 11:41AM ]

    I have a Chapter 7 bankruptcy that I filed is that he and I have like 2 to 3 weeks before I get my discharge I want to head trying to go finance a truck and they said I couldn't do nothing until my discharge is it easier effort to discharge to get a car loan

  13. 13. Karl [ July 08, 2017 @ 03:29PM ]

    I keep getting notices for a car loan, but I don't need a car. What can I do to stop creditors from sending me these notices?


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