If you really need to purchase a car before filing for bankruptcy (BK), it might be possible for you to do so. There may even be some advantages that come with buying a vehicle pre-bankruptcy. However, you will only be able to successfully make this purchase and hold onto the car during your filing if you are buying it out of necessity.
In fact, if any other type of motive is detected by the bankruptcy court, you could lose the vehicle or your entire case could be dismissed.
Buying a Car with Cash before a Bankruptcy Filing
Most bankruptcy lawyers advise their clients not to incur additional debt prior to filing for bankruptcy. With this in mind, filers who need cars might purchase them with cash. But you have to be careful about paying cash for a vehicle right before your BK filing.
This kind of purchase carries benefits for some Chapter 7 BK filers. And your court-appointed trustee will be aware of these benefits and want to be 100% certain that you're buying the car for the right reasons.
In most states, debtors who file for Chapter 7 are allowed to keep their vehicles as long as the equity they have in them doesn't exceed a certain amount. A car that qualifies is referred to as "exempt" property and will not be sold in order to repay creditors.
Cash in your bank account, however, is seldom protected by exemption laws. In a Chapter 7 bankruptcy filing, this money is likely to be seized. So it stands to reason that if you use this cash to buy a car, it won't be available to repay lenders.
Because of this, your trustee will be on the lookout for a few things in order to verify that the vehicle was purchased "in good faith."
- Is the car brand new and expensive or an affordable used model?
- When was the vehicle purchased? If it was literally right before your BK filing, it might throw up a red flag.
- Did you already own one or more drivable cars?
If you're planning on buying a car with cash before your bankruptcy filing, you'll need to make sure that you can prove it was a necessary purchase. Also, you'll need to check your state's motor vehicle exemption laws in order to find out if they are generous.
Buying a Car with an Auto Loan before a Bankruptcy Filing
Again, it isn't the best idea to take on new debt before filing for bankruptcy. Your BK is meant to eliminate or reduce your existing debt. So it might look strange to the court if you've committed to an additional obligation.
But if you really need a car and you don't have enough cash to purchase one, financing will be your only option. Once again, though, it must be clear that this is an absolutely necessary purchase.
Pre-bankruptcy auto financing can also come with advantages for BK filers. In the case of Chapter 7 bankruptcy, some debtors make too much money to pass the Means Test. But if the deduction allowed for an auto loan brings their income down enough, they'll be able to pass the Means Test and qualify to file for Chapter 7.
For Chapter 13 filers, having a car loan can reduce the amount of money that they'll owe in their repayment plan. So the court will be less than pleased if it appears that you've taken out an auto loan just to cheat your creditors.
Also, you should know that many lenders will not work with you if it is apparent that you'll be filing. Your bankruptcy might allow you to force the lender into "packing down" the loan. This means that you would only have to pay for the current value of the car instead of the financed amount. And because vehicles depreciate, the lender is likely to lose money in this situation.
Purchasing a Vehicle During or After Bankruptcy
If there is any way that a car purchase can wait, it's best to buy your vehicle after your BK filing. It's also a good idea to purchase your car with an auto loan instead of cash. Why? It is likely that you will emerge from your bankruptcy with damaged credit. And your car loan will give you an opportunity to start rebuilding your credit with timely payments.
In the case of a Chapter 7 filing, ideally, you should wait until you have your discharge papers. A Chapter 7 bankruptcy typically only takes a few months to complete. And most dealerships prefer to work with BK buyers who have been discharged.
Because Chapter 13 takes 3 or 5 years to complete, you may need to finance a car during this time. There is, of course, a process that you have to follow in order to be approved. But it is possible to get financed while in the middle of a repayment plan.
If you're in or have just completed a bankruptcy and need to buy a car, Auto Credit Express can help. We can quickly match you with a dealership in your area that can give you a better chance at approval.
Our service is also free and comes with no obligations. So go ahead and fill out our simple and secure online application to get started today.