Founding Attorney
During your bankruptcy case, your finances and assets are carefully reviewed by the trustee appointed to administer your case. Incurring new debt to purchase or buy a car with cash could raise several issues.
Before you purchase a new car during bankruptcy, talk with your Massachusetts bankruptcy attorney. There could be numerous issues that must be addressed. If not, those issues could cause problems in your bankruptcy case, including a dismissal.
Purchasing a New Car During a Chapter 7 Bankruptcy
If possible, wait until you receive a Chapter 7 discharge before buying another car. However, if your circumstances do not permit you to wait, discuss your options with your bankruptcy lawyer. If you can find a lender to give you a loan during Chapter 7, your attorney may advise that it is okay to buy a car before the case is closed.
However, there are some things to consider. Purchasing a car may raise questions about your disposable income. You claimed you could not afford to pay your debts because you did not have sufficient disposable income. Now, you are telling a lender you can make a car payment.
You also need to discuss your bankruptcy exemptions with your attorney. When you filed Chapter 7, you had to choose between the Massachusetts state exemptions and the federal bankruptcy exemptions. Both sets of exemptions limit the amount of equity in a car that is exempt. Therefore, tell your attorney what car you want to purchase so they can review your exemptions to ensure the equity in the car is protected.
Your bankruptcy discharge does not apply to debts incurred after you file your Chapter 7 petition. It also does not prevent the creditor from taking collection actions against you if you default on a loan you received after filing Chapter 7.
Purchasing a New Car During a Chapter 13 Bankruptcy
Generally, you must obtain court approval to incur debt during your Chapter 13 bankruptcy. The steps for obtaining court approval include:
- Locate the type of vehicle you want to purchase. You need to know how much you are financing for the motion.
- Find a lender willing to make a loan during a Chapter 13 bankruptcy case. The lender must give you a sample financing statement providing the loan terms (i.e., loan amount, monthly payments, interest rate, term, etc.)
- Your attorney prepares and files a Motion to Incur Debt with the bankruptcy court. The motion includes the information about the car you wish to purchase and the loan terms.
- The Chapter 13 trustee or another party may object to the motion. If so, you will need to argue why you should be allowed to incur debt at a hearing.
- The court will likely approve the motion if no one objects and the terms are reasonable.
Incurring new debt increases your financial burden. The Chapter 13 trustee carefully reviews your motion. They must ensure that incurring new debt will not prevent you from paying your bankruptcy payments.
Other issues to consider are bankruptcy exemptions and cash payments. The bankruptcy exemption may be insufficient if the vehicle has substantial equity. If so, your bankruptcy plan could increase because you must pay an amount equal to the non-exempt equity to your unsecured creditors.
If you pay a cash down payment, the Chapter 13 trustee may question how you obtained the cash. The trustee wants to ensure you did not borrow the money from friends or relatives, thereby incurring new debt. The trustee also wants to ensure you did not have money hidden away and that you did not report on your bankruptcy schedules.
Talk With Our Massachusetts Bankruptcy Attorney About Your Options for Debt Relief
Filing for bankruptcy may be the best way to eliminate your debts and give you a fresh start. If you are interested in bankruptcy, contact Logan A. Weinkauf, P.C., to schedule a free consultation with our Massachusetts bankruptcy attorney.