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Special Finance®

Risk and Reward

April 2010, F&I and Showroom - Feature

by Rob Hagen

Credit availability for subprime customers is still low, but the well is not dry. In fact, there are signs that special finance is making a comeback, with the bankruptcy niche leading the way. Finance sources with an established history in the bankruptcy segment know the payoff is worth the risk. They know those consumers will be relatively debt free at the end of the process and motivated to reestablish their credit.

That makes BK customers an ideal candidate for financing. And with bankruptcy filings soaring to heights not seen since 2005, this is a segment that’s ripe with opportunities. In 2009, bankruptcy filings shot up 32 percent to more than 1.47 million for the year. The surge mirrors what happened five years ago, when consumers were trying to take advantage of older, less restrictive filing guidelines before revisions to the U.S. Bankruptcy Code took effect.

Getting Them Early

The two most common forms of bankruptcy in the United States are Chapter 7 and Chapter 13. Chapter 7 is, for all intents and purposes, a debt liquidation program. The 2005 revisions were designed to send more consumers toward Chapter 13, which requires consumers to set up repayment plans with their creditors. Chapter 7s are typically discharged after 90 to 120 days. Chapter 13 bankruptcies can take several years to complete.

Dealers tend to find more success with Chapter 7 customers. To understand why, you need to know the two key events in the process: the filing date and the 341 meeting.

• Filing date: This day kicks off the process, and it’s the single most opportune time to reach out to a customer in this segment. They’re hungry for knowledge and competition for their business is minimal.

• 341 meeting: About 30 days after filing, the customer will appear for what’s called a 341 meeting. He or she will be sworn in to testify to the state of their finances and learn whether their bankruptcy will be contested. Depending on the number of creditors and the complexity of the case, the bankruptcy stands to be discharged 60 days later. However, lenders specializing in the segment can begin approving customers for loans immediately after the 341 meeting ends.

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