Does Bankruptcy Affect Car Insurance?

Will a Bankruptcy Impact Your Auto Insurance Rates?

Bankruptcy could indirectly affect your car insurance rates because it is recorded on your credit reports. Auto insurance companies don't check credit reports, but many use specialized credit-based insurance scores derived from credit reports to help set your rates.

Bankruptcy harms credit scores for as long as it remains on your credit reports—seven years from the filing date for Chapter 13 bankruptcy and 10 years for Chapter 7. Its negative score impact lessens over time, but if insurance carriers in your state use your credit-based insurance scores to help set rates, bankruptcy could lower your score and trigger higher premiums.

How Bankruptcy Affects Car Insurance Rates

Insurance scores are not the same as the traditional FICO^® Scores^☉ and VantageScore^® s® lenders use to evaluate loan and credit applications. But insurance scores are based on the same underlying data: the history of debt and repayment recorded in your credit reports with the national credit bureaus (Experian, TransUnion and Equifax).

Standard credit scores are designed to predict your likelihood of defaulting on a debt (failing to make a payment for 90 days or more) within 24 months. Credit-based insurance scores are designed to predict the likelihood that you'll file a claim that causes the insurance company to lose money. Insurers view a low credit-based insurance score as a sign that you could be a risky customer. As a result, they might charge you higher rates.

What to Do if Your Auto Insurance Is Canceled After a Bankruptcy

If a bankruptcy (or any other event) leads your car insurance provider to substantially raise your premiums, shop around for alternatives. As with lenders, each insurance company sets its own standards for deciding whether to work with applicants, so other companies may be willing to offer you coverage—at a potentially steep price. Experian's auto insurance comparison tool allows you to get quotes from many insurers at once so you can compare your options.

If you can't find an auto insurance provider to cover you, your only option for securing a policy may be your state's high-risk auto insurance pool. Premiums will be hefty, but if you can get through a year or two without filing any claims or racking up accidents or tickets, you may qualify for coverage from a standard insurance company.

How to Save on Car Insurance

If bankruptcy has saddled you with steep car insurance premiums, taking steps to rebuild your credit as soon as the bankruptcy is final can eventually bring relief, but it likely won't be a quick fix. The following tactics may help you trim costs to make your auto policy more affordable in the near term:

1. Increase your deductible. You can get a lower premium by choosing a higher deductible. Because that will increase the amount you pay out of pocket in the event of a claim, make sure you have enough money in savings or your emergency fund to cover your deductible if it becomes necessary.
2. Seek pay-per-mile insurance. Some insurance providers offer policies that allow you to pay a comparatively low flat daily or monthly fee, plus an additional charge for each mile you drive. If you are retired, work from home or have a short commute, pay-per-mile coverage could save you money compared with traditional auto policies.
3. Drop optional coverage. States typically require a minimum level of auto liability coverage—insurance to cover costs of any accident you may cause, such as repairs on other drivers' vehicles and medical treatment for occupants of those vehicles. You may also opt for collision coverage, which helps pay for repairs to your own vehicle if you cause an accident. If you own your car outright, you may be able to lower your auto insurance premiums by reducing or even eliminating collision coverage. However, this will mean you'll be on the hook for paying to fix your car if you're in an accident. Note: If you are making payments on a car loan, your lender will require you to maintain collision coverage (and probably comprehensive coverage too) on your vehicle, so this may not be an option for you.
4. Consider a driving monitor. Some insurance companies reduce your premiums if you use a smartphone app or a plug-in device to track and report your driving habits. If the monitor attests to safe driving habits, you can reduce your rates even further—but if it exposes you as careless or reckless, your premiums also could go up.
5. Take a defensive driving course. Some insurance carriers reduce your auto premiums if you take a qualifying defensive driving course. These classes, available in many states through private companies and organizations such as AAA and AARP, typically cost less than $100 and could save you $1,000 or more in annual insurance costs. Note that classes mandated by traffic courts or DMVs typically don't bring insurance discounts, and that you may have to wait several years after claiming a defensive-driving rate discount before you're eligible for another one.

The Bottom Line

Bankruptcy-induced damage to credit scores affects your access to credit and can also drive up your car insurance rates—or even jeopardize your carrier's willingness to provide auto coverage. Time, patience and discipline can help you rebuild your credit after bankruptcy, and may eventually help bring your auto insurance rates back into line.

A great way to track your credit recovery is to regularly check your credit score for free from Experian. As your recovery continues, you may come to think of your bankruptcy and its attendant insurance rate hike as a minor detour on a long journey.