Being overwhelmed by debt and having no reasonable way to pay your bills every month is no way to live. You may have already heard about the possibility of filing for bankruptcy. Well, you heard right – it is one of the few options that exist for getting a fresh start.
For many folks, bankruptcy can be the only option. A repayment plan doesn’t always help remove the debt burden, and neither does refinancing. Even in the cases when the only choice left seems to be the one between chapter 7 or chapter 13 bankruptcy, it can be possible to keep a vehicle through the process.
Bankruptcy laws vary from state to state, but there are a few loopholes in the law, some of which many people take advantage of.
As you weigh the answers to this question and scenario, you will have to decide for yourself whether or not buying a car right before filing for chapter 7 or chapter 13 bankruptcy is a good idea.
Is Buying A Car in Bankruptcy Possible?
In some states, buying a car right before filing for bankruptcy is 100% legal. You can even open several more credit card accounts with your pre-bankruptcy credit score.
If you do not list these on your bankruptcy papers as assets and debts, the court, as well as the creditors of your bankruptcy, do not know that you have them. Not only is this dishonest, but it could also get you into legal trouble if your misgivings are discovered. Indeed, loan creditors may do some digging around in your finances to see if you can pay them back and uncover all of your transactions.
The better alternative is to go ahead with buying a car but completely refraining from any other purchases that can “hit” your credit score. Additionally, you would also declare the car on your chapter 13 or chapter 7 bankruptcy papers as an asset.
Through this method, you are being honest with the court that you have this new car and that you are creating more debt before dealing with your bankruptcy proceedings. However, many courts could interpret a recently-purchased car as a necessity, so long as it is not in excess of any vehicles you (and your spouse) already own and it is not a luxury car.
Your Car Purchase Can Signal Different Things To The Bankruptcy Court
If you purchase vehicles which are luxury vehicles or which are deemed to be in excess, it can signals to the bankruptcy court judge that:
- You may be hiding money or other assets you could liquidate to pay your debts.
- You are racking up debt (such as a car loan) that you hope to cancel out on your bankruptcy.
- You now have extra vehicles which you can sell or liquidate to pay some of your debts.
As such, the judge may force you to sell and/or return the extra or luxury vehicle to pay some of your bills or loans rather than grant you a full discharge of your debts. It’s a gray area at best, and you are taking your chances by buying a new car if you do not really need it.
Additionally, if you pay for the car in full without the aid of a car loan, this may raise some doubt with the court. For example, a chapter 7 bankruptcy judge may ponder how you were able to complete such a transaction while not simultaneously managing your other debts.
If you trade in an old car and buy a used car for cheap while paying for it in full, a bankruptcy judge may not necessarily consider this an issue, mostly because you are supposed to be making a thought-out and measured purchase, not an excessive one. In fact, this is the best approach overall, since you’re able to buy a car while also maintaining your debt level. In most instances, you’d likely be able to keep the car because you gave up the old one.
States Where A Purchase Is Not Feasible
You may be perceived as someone with impulse control issues or an inability to manage your finances properly when you buying a car right before chapter 7 or chapter 13 bankruptcy, or during the bankruptcy process itself. The judge may think you are trying to escape your financial responsibilities and, ultimately, that you may not be thinking of the consequences of your actions.
For these reasons, you may be denied the right to buy a car by the bankruptcy process, especially if you already have a functional vehicle. Since a bankruptcy filing with the courts automatically places it on the public record, even when you have not had a hearing on it yet, the car dealerships can and probably will deny you financing for a car loan. In fact, they won’t even take a look at your credit score at that time.
Since every bankruptcy case is different, and whether you’re looking into chapter 7 or chapter 13 bankruptcy, be sure to ask your bankruptcy lawyer about the laws in your own state.