Can I Buy a New Car While In Chapter 13 Bankruptcy?
During the three to five years that you’re making payment on your Chapter 13 bankruptcy, you can’t take out any new debt without getting permission from the bankruptcy court. This provision is there to protect you from getting into further financial trouble as well as to protect new creditors from losing money if you are unable to pay them back. Sometimes it is necessary to purchase a new or used car. For example, if your car breaks down and there’s no other way to get to work, or you wish to trade your current car in and get a more reliable and perhaps a nicer car. There is not requirement that you have to drive in an old clunker if you are in bankruptcy. Ok, you want to stay away from a new Porsche, the trustee might object when you propose to purchase a new car that is ten times the value of the trustee’s vehicle. You can purchase a new or used car during your chapter 13 bankruptcy case. There’s a process you have to follow. In most cases the car creditor requires an order from the court allowing you to purchase a new car. The process below is for the St. Louis Metro area. The process might be different in other districts.
The first step is to make sure you can afford the car payment. Schedule I and J, these are the schedules in your petition which list your income and expenses, must show that you can afford the new car payment. You and your bankruptcy attorney will need to look at your current income and expenses to make sure that there is sufficient money in the budget to pay the plan payment and the new car payment. You might have to reduce expenses on other items such as clothing or miscellaneous expenses to make the budget work. However, you cannot make up number, but you can reduce your expenses if it becomes necessary. Your expenses must be reasonable. Food of $30 for a one person without any other help such as food stamps or contributions from family members are most likely not reasonable and will draw an objection by the trustee.
The next step will be for you to find a car-dealer who will sell you a car with a monthly payment that fits into your budget. Our office works with a car-dealer together who has a financing partner who is specialized in providing loans to people who are in bankruptcy. One might think that it is difficult to obtain a loan while in bankruptcy. That is not necessarily true. It depends on your credit. If your credit was low due to reports of delinquent accounts before filing bankruptcy, it might be easier to obtain a car loan after filing because the negative entries on your credit report stop after filing for bankruptcy. The car loan will be paid directly to the car dealer, not to the trustee. The contract will be outside of the bankruptcy.
The third step is for your attorney to file a motion to incur debt/ purchase a new or used vehicle with the court. In that motion your attorney will have to state the whole loan amount, the monthly payment and the reason why you need to purchase the new vehicle. You do need to have a reasonable explanation. If you don’t provide a reason or the reason is that you just like cars, the trustee will object to your motion. An acceptable reason is that your old car broke down, or requires so many repairs that it is not feasible anymore to repair the car and that it makes more economic sense to purchase a newer or even a new vehicle.
If the trustee is not objecting and the court grants your motion, your attorney can now submit the order. Within a few days, the court will file the order and you can purchase the car.
What if the car I wanted was sold in the meantime?
That happens. The motion should request to purchase permission for the car you want with the monthly payment you can afford and should add that in the case that vehicle is not available that you have permission to purchase a similar vehicle with a monthly payment not exceeding the amount stated in the motion. This way, you are not bound to one specific vehicle.
Can I trade in my old car?
Yes, you can but it is up to your car creditor to agree to it. It will be easier if the new car creditor is the same as your old car creditor because he would have a benefit from the trade in. After trading in your old vehicle, your car creditor will be paid directly by you and will receive the contract interest rate. Before, your car creditor received only a monthly payment stretched out over the length of the plan (usually 5 years) with the courts interest rate, currently 5.04%, that is pretty good for the debtor as we see sometimes contract interest rates of over 20%. But even if your new car creditor is not the same lender, you might be able to offer your old lender a good deal. With a trade-in the old lender would receive a lump sum now, instead of waiting perhaps years for the money to be paid in full. He would be entitled to contract interest rate and full loan balance. The offer could be to pay more to the old lender than he would receive through the bankruptcy plan.
When you trade-in you still would need permission from the court and the old lender would have to agree to release his lien.
Can I sell my car while I am in bankruptcy?
Yes, same problem, the lien hold will need to agree to it. If you get money out of the deal, you either will have to turn over the money to the trustee or your attorney files a motion to retain the money for necessary and reasonable expenses.
After you trade in your car or sell it, your attorney will need to object to the claim filed by your creditor in your bankruptcy case because otherwise your creditor will continue to receive monthly payments from the trustee.
Trading in your vehicle before filing for bankruptcy.
No problem when you file a chapter 13, but be careful when you file a chapter 7 and the new vehicle is now titled in the non-filing spouse and the previous car was in both of your names. Even though the previous car was exempt through the Tenancy by the Entirety Exemption, after trading in the car, receiving value for it by either receiving cash or a lower payment on the new car, you actually made a preferential or fraudulent (548 U.S.C) transfer the chapter 7 trustee can avoid. Before transferring any property, talk to your bankruptcy attorney about it. The argument that the first vehicle was exempt, will not matter after the Eights Circuit decided end of 2011 in Re Lubar that the trustee can avoid such a transfer.