Can I Buy a New or Used Car While In Chapter 13 Bankruptcy? May I trade-in my old vehicle?
During the three to five years that you’re making payment on your Chapter 13 bankruptcy, you can incure new debt only with permission from the bankruptcy court. This provision is there to prevent the debtor from jeopardizing the success of the chapter 13 plan by incurring new debt which might be too high to repay.
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 in your current car and get a more reliable and better car. There is no requirement that one has to drive an old unreliable vehicle while in bankruptcy. As long as the new vehicle is reasonable and would not be considered a luxury vehicle, like a new Porsche, the motion to incur new debt is normally approved if it is both necessary and reasonable. There is 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 (Eastern District of Missouri). 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 St. Louis 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 both the plan payment and the new car payment. You might have to reduce expenses on other items such as clothing or miscellaneous expenses to ensure that your budget is balanced. You cannot make up numbers, but you can reduce your expenses if it becomes necessary. Your expenses must be reasonable. Food of $30 for one person without any other income, such as food stamps or contributions from family members, would 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 your budget. Our office works with a car-dealer who has a financing partner who is specialized in providing loans to people 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 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 debt is incurred after filing and not part of the bankrutpcy plan.
The third step is for your bankruptcy attorney to file a motion to 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 you need to purchase the new vehicle. The motion should explain why a new or used car is necessary. If you don’t provide a valid reason, the trustee will object to your motion. An acceptable reason is, for example, 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 does not object and the court grants your motion, your bankruptcy attorney can now submit the order to the court. Within a few days, the court will file the order and you can purchase the car.
What happens if the car I wanted to purchase was sold in the meantime?
The motion filed by your bankruptcy attorney should describe the terms of loan and the specific vehicle, it also should request permission to purchase a similar vehilce if the other car is not availabe anymore. Then you are not bound to one specific vehicle and have permission of the court to purchase another vehicle with similar terms.
Yes, you can, but it is up to your car creditor to agree to it. Your car creditor has a lien on your vehicle and does not have to agree to the release of his lien. 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 by the chapter 13 trustee which stretched out over the length of the plan (usually 5 years) with the courts interest rate, currently 5.04%. Paying the car loan through the bankruptcy is benficial to the debtor because it lowers the monthly car payment and reduces the interest payments. We see contract interest rates of over 20%, so there is a clear benefit to paying it through the bankruptcy. However, even if your new car creditor is not the same lender, you might be able to offer your old lender payment terms that are more beneficial to him. Trading in your old car, 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 that has a loan balance?
Yes, but you have the same problem as with trading in your car, the lien holder will need to agree to the sale. If you receive money after the lien holder is paid, you either will have to turn over the money to the trustee or your attorney need to file a motion to retain the money for necessary and reasonable expenses.
After you trade in your car or sell it, your bankruptcy 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.
There should not be any problem with trading in your vehicle before filing of a chapter 13. It can cause a problem if you file a chapter 7 bankruptcy case, when the old vehicle was titled in both of your names and the new vehicle is now titled in the non-filing spouse’s name only.
By letting the filing spouse’s interest of the old vehicle go into the new vehicle owned by only the non-filing spouse, the filing spouse made a possible preferential or fraudulent (548 U.S.C) transfer the chapter 7 trustee can avoid. The argument that the first vehicle was exempt by the tenancy be entirety exemption, will not matter after the Eights Circuit decided end of 2011 in Re Lubar that the trustee can avoid such a transfer. Before transferring any property, speak your bankruptcy attorney to determine the best course of action.