13 Aug Recent Purchase of Vehicle May Defeat Chapter 13
I recently filed a Chapter 13 case in the Northern District of Georgia that includes a new vehicle my client purchased about two months prior to filing. He explained the purchase to me by noting that he had recently been transferred to Georgia by his employer and that he needed reliable transportation to drive home (an 800+ mile trip to the midwest) to visit his 10 year old son who lives with my client’s ex-wife. He claimed that his previous vehicle was prone to breakdown and, anticipating his bankruptcy filing my client knew that he would not have access to credit cards to pay for emergency repairs. The cost of the new vehicle was around $21,000, although the purchase price included about $8,000 rolled in from the prior vehicle.
I explained that this recent vehicle purchase could generate a trustee objection and it has. The Chapter 13 trustee here takes the position that the purchase of this new vehicle is a bad faith purchase, especially since we are proposing a 10% payback to unsecured creditors.
At this point, the trustee has agreed to reset the confirmation hearing until after the bar date for claims. Unsecured creditors who do not file claims in Chapter 13 do not participate in Chapter 13 distributions so if enough unsecureds do not file claims, I can increase the divided to the ones who do file.
Otherwise, I will have to argue this issue. Will the judge accept my argument that a 10% payout to unsecureds is “the best that the debtor can do?” If the purchase was not quite so recent I might have an argument that Section 1325(a) does not apply and that the trustee has the power to cram down the claim (see my colleague Cathy Moran’s discussion of the anti-cram down rules of Section 1325(a) by clicking here).
This episode has left me much more conservative with regard to filing a Chapter 13 when there has been a recent vehicle purchase. I may win this argument or I may not, but my client will be in limbo for several months and if the case is dismissed he will have spent a lot of money and will end up much further behind with his other creditors at dismissal.
As I have written elsewhere on this blog – don’t be a bankruptcy test case.
Jonathan Ginsberg, Esq.
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