by: Baran Bulkat, Attorney
In general, taking on more debt shortly before filing for bankruptcy is not a good idea. It can lead to objections to your discharge and even allegations of fraud in more egregious cases. While we can’t advise you to incur more debt prior to filing your case, whether purchasing a car before or after bankruptcy is in your best interest will typically depend on:
- the condition of your current vehicle
- whether you intend to finance your purchase, and
- whether you are filing for Chapter 7 or Chapter 13 bankruptcy.
To learn more about what you can do to get the most out of your bankruptcy, visit our Prebankruptcy Planning section.
Buying a Car With Cash Prior to Bankruptcy
If you are considering buying a vehicle without taking out a car loan, you should review your bankruptcy exemptions to make sure it will be safe in Chapter 7 bankruptcy. Most states have a motor vehicle exemption that allows you to protect a certain amount of equity in your car. If you can’t fully exempt the value of your car, a Chapter 7 bankruptcy trustee may be able to sell it to pay your creditors.
In most cases, it’s easier to exempt the value of a car than it is to exempt cash or money in the bank. This may lead some debtors to purchase a car to use up their cash prior to filing their case. In general, courts allow debtors to engage in a reasonable amount of prebankruptcy exemption planning. But when deciding whether your car purchase was reasonable, courts can consider factors such as:
- the year, mileage, and condition of your current vehicle
- the number of cars you own, and
- whether a member of your household needs a new car.
Financing a Car Before Bankruptcy
Taking out a car loan to buy a new vehicle shortly before filing your case may lead your bankruptcy trustee to question the purchase in more detail. Having a car loan typically allows you to qualify for Chapter 7 bankruptcy more easily because you can deduct an additional car ownership expense on the means test.
If you have a hard time qualifying for Chapter 7 bankruptcy without the car ownership deduction, financing a new car prior to filing your case can raise a red flag. At your meeting of creditors, the trustee will typically ask you detailed questions about why you purchased the car. Unless you have a good reason for buying the car (such as to replace a broken down vehicle), the trustee may argue that you abused the system and bought the car solely to qualify for Chapter 7 bankruptcy (or to pay less to your unsecured creditors in a Chapter 13).
Can You Qualify for a Car Loan After Filing for Bankruptcy?
In most cases, you can qualify for a car loan shortly after receiving your bankruptcy discharge. If you have a decent amount of income, many car dealers will be willing to finance your purchase despite your bankruptcy. But keep in mind that your interest rate will typically be higher after bankruptcy.
If you are considering filing for Chapter 13 bankruptcy, remember that Chapter 13 repayment plans usually last three to five years. While in bankruptcy, you must obtain court permission before taking out a new loan to buy a car. This means that if your current vehicle is on its last leg, it may be more advantageous to buy a car prior to filing your case.