You are in Chapter 13 bankruptcy and you need some wheels. It is possible to purchase a car while in an active Chapter 13 case, but you will need to go through a few extra steps than the average car buyer. Considering that Chapter 13 bankruptcy last three to five years, you may wonder: Can I Buy a Car While in Chapter 13 Bankruptcy?
Talk to Your Attorney
First things first. Discuss your plans to buy a car with your bankruptcy lawyer. If you are able to save enough cash to purchase a vehicle outright, then you can simply buy the car. Most debtors, however, require financing from a lender. You can buy a car with financing while in Chapter 13, but you should first discuss it with your attorney.
The whole point of filing a Chapter 13 is to obtain a discharge, which is a permanent injunction from the court that releases the debtor from personal liability for his or her debts. In a Chapter 13, you obtain a discharge by successfully completing your Chapter 13 Plan. The Plan provides for repayment in fixed monthly amounts for 36 to 60 months. The trustee distributes those funds to your creditors according to the terms of the Plan. If the new car will compromise your ability to fund your Chapter 13, then your attorney will advise against it. If you need a vehicle to get to work or care for children, however, you will likely be approved.
Find a Dealer Who Will Extend Financing
Unless you have a close friend at the local dealership, the ability to buy a car hinges on obtaining financing. While you are in Chapter 13, this sometimes proves to be difficult. Many factors will affect your ability to obtain financing. Those factors include your bankruptcy filing, pre-bankruptcy credit history, debt-to-asset ratio, and income. “Bad credit” car loans have very poor interest rates, sometimes as high as 23 percent.
Still, vehicles are a necessity for most debtors, and especially for my Maryland and Virginia bankruptcy clients. It is advisable to wait for at least a year after bankruptcy to obtain new financing. But many times my clients need a vehicle and have no other choice. Request the terms in writing from a willing lender and provide them to your attorney. The process can take up to 30 days, so plan accordingly.
Get the Trustee’s Approval
The trustee will automatically object to the purchase of a luxury car. (The vehicle pictured above is a 2016 Lexus LC 500. The trustee would object if you tried to purchase it.) In addition, the trustee will object if you cannot show that you will be able to afford the new vehicle’s monthly payment.
The purchase of a car often entails the incursion of additional monthly expenses – such as gas and insurance – beyond the cost of the car loan itself. The trustee wants the debtor to complete the Chapter 13 Plan according to the exact terms of the confirmed Plan. You must therefore address the trustee’s concerns that the new car will not impair your ability to repay the debt. The trustee will carefully scrutinize any amendments to your income and expenses during this process.
If the trustee does not believe that you need a new vehicle, or believes that taking on more debt will impair your ability to fund the Chapter 13 Plan, then you should reconsider the purchase. If the car is an absolute necessity, then we will proceed with a Motion to Incur Debt and let the judge decide.
File a Motion to Incur New Secured Financing
In an open Chapter 13 case, debtors are required to obtain the bankruptcy court’s permission before taking on new debts. That includes new car and home purchases. Your attorney will file with the court a Motion to Incur Debt, sometimes also called a Motion for Authority to Incur New Secured Financing.
The motion will state that the terms of the new debt are reasonable and will not interfere with your bankruptcy Plan. The motion will be sent to all creditors and parties in the case. There will be a court hearing on the motion. You must show that will be able to make the new monthly payment in addition to your Chapter 13 Plan payment. In most cases, the motion to purchase the vehicle is granted by the court. Your attorney will charge you a fee for the motion, notice and hearing, and that fee will be granted by the judge and paid by the trustee through the Plan.
Buying a car will not be very helpful if you default on the monthly payments and the car gets repossessed. If you have to choose between making your car payment or Chapter 13 payment, you should let the car go. No one can foresee events that may lead to your inability to make payments on the car, which is exactly why it is so important to carefully weigh your options – before you purchase the car – with your attorney.