In general, bankruptcy debtors may not enter into major transactions such as buying a car or refinancing a house without the bankruptcy trustee's or the court’s approval. Read on to learn more about buying a car or refinancing your home during bankruptcy.
If you refinance during bankruptcy, it may affect your case. The trustee and the court may be interested if you have sudden access to new cash. For example, a refinance may mean a lower monthly expense or even cash out of your home equity. The sale of a house may also mean that the property was not properly valued. These are all flags that can cause the trustee to scrutinize your bankruptcy.
If you need to purchase a car out of necessity, the court or the trustee will generally not prohibit you from buying it. They understand that people need a car to get to work and they want your bankruptcy to succeed. They just want to make sure you did not lease that dream BMW but bought a reasonable car instead. They should approve the sale of a house or refinance if there is a specific reason like a hardship or an anticipated interest adjustment that will cause you to default on your payments anyway.
A Chapter 7 bankruptcy can be completed within 90 days so you only need to wait that short period if you want to buy a car or refinance your home. If you need transportation, try to borrow a car, see if you can get a deal on long term rentals, or go green and use public transportation.
If you are in a Chapter 13, be very careful because your plan payments were approved based on your income and expenses at the time of filing. If you want to add a cost like a car or lower mortgage payments by refinancing, the trustee may decide to reexamine your entire cash flow profile which could result in an increase in your plan payments.
Due to current economic conditions, car dealers are extremely eager to sell cars. They may overlook the fact that you are in a bankruptcy and sell you a car anyway (or it is possible they did not even know they couldn’t sell you a car without approval). In that case, it is best to let the trustee and court know right away.
Although they have the power to punish you, the trustee is likely to grant a post purchase approval if you did not buy an expensive car or the purchase did not affect your financial situation too much. But check with your attorney first to learn about your options. (Note: it is unlikely that a bank will refinance a home without trustee approval since they were notified directly of the bankruptcy.)
The key to remember is disclosure. If you inform the trustee of any major financial changes then you will be fine. If you have an attorney, keep him or her appraised of your changes. Your attorney should help you through the process.
Also, be aware that the restrictions above apply even if you want to cosign on a debt such as a car loan or student loan for a child.