Buying A Car Before Or During Bankruptcy

If you are thinking of filing for Bankruptcy, one of the items on your checklist to think about is your car.  Should you purchase a new car or used car prior to filing for bankruptcy protection?  What about your spouse’s car? \

As an attorney, the current status of the law would prevent me from counseling you on taking on more debt prior to filing for bankruptcy.  So, as a consumer, you are on your own.  But, if I were in your position, I would be thinking about these things.

First, if you are thinking about a Chapter 7, and you will need a different car, the answer is easy.  Simply put, a financed vehicle on your credit report will help you rebuild credit quicker after filing for bankruptcy.

If your credit is still good or pretty good, you should try to get a vehicle before you file.  If your credit is just o.k. or you need a co-signor, then you may still want to take the plunge depending upon your financing terms.  If your credit is in the toilet, then you are probably better off holding onto your car when you file and then afterward start socking away some cash just in case your car needs repairs.

Find out from your attorney which exemptions will be applied in your case and how much equity you will be allowed to protect. If you are filing for Chapter 13, the same analysis applies before you file for bankruptcy.  If you suddenly find yourself in a position where you need a car after you have filed for Chapter 13, the procedure is different.  You will need the Court’s permission to enter into any contracts to purchase a motor vehicle.  This varies from State to State, District to District and maybe even Judge to Judge.  So, before you think about purchasing a motor vehicle, please speak with your attorney.

My clients have been experiencing some problems financing vehicles, as there is quite a bit of bad information out there about the process of approval by the Court.  Second, the lenders are few and far between these days.  The lenders are requesting more information, co-signors and more money down.

In Florida, we have a $1,000.00 equity exemption for an automobile.  Yes, I agree it’s terrible.  Unless, I can protect the equity elsewhere, this is a problem.  The Court wants to know where the money is coming from.  Usually, the down payment or co-signor is a relative, friend or employer.

Your attorney may already have a relationship with a new and used car dealership.  By this I mean that both parties have already been through the procedure and understand that you will need Court approval for the purchase of the car.  Likewise, the dealership will have to be patient until the Court approves the purchase.

As the Debtor purchasing the car, you will be increasing your responsibilities under the Chapter 13 Plan of Reorganization.  If you make all your payments on time, the purchase of a car during the bankruptcy process could go a long way in helping you rebuild your credit during and after the bankruptcy.  Likewise, it could save you money on repairs in the long run.

With today’s economic conditions being what they are, it may actually be cheaper to purchase a new car, than it would be to purchase a used car.  If you knew me personally, you would never expect those words to come out of my mouth; however, many new car dealerships have excess inventory and need to move cars now. Used car sales are higher than they have ever been and new car sales are down lower than they have ever been.  So, the incentives are out there to purchase new cars.