Taking on debt shortly before filing for bankruptcy isn’t a good idea. It can lead to objections to your discharge and even allegations of fraud in more egregious cases. Whether purchasing a car before or after bankruptcy is in your best interest will typically depend on:
To learn more about what you can do to get the most out of your bankruptcy, see Prebankruptcy Planning.
If you’re 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 might 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 could lead some debtors to purchase a car to use up their cash prior to filing their case. 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:
Find out more about planning for 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 could 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 Chapter 13).
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. Many will consider you to be a good financial risk because you’ll have wiped out much of your debt and you filed a Chapter 7, you won’t be able to do so again for eight years. But keep in mind that your interest rate will typically be higher after bankruptcy.
If you are considering filing for Chapter 13 bankruptcy, and your current vehicle is on its last leg, it might be more advantageous to buy a car prior to filing your case. Here’s why.
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—and doing so isn’t easy. You have to locate the vehicle you’d like to buy and get the court to approve the vehicle itself and the financing. Most sellers won’t be willing to wait for the process. And, if you propose to reduce the amount you pay unsecured creditors to finance the vehicle—which can be done—you risk the additional problem of creditor objections.