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 [email protected].