Can I Buy A New Car While In Bankruptcy?
You are able to buy a new car while in bankruptcy, but the process is different depending on whether you are in a Chapter 7 or Chapter 13. Additionally, there are different real-world considerations that must be taken into account.
In Chapter 7, you have the ability to buy a new vehicle as soon as you file the case without requiring permission from your bankruptcy trustee or the court. Since the financing on the vehicle is incurred after the bankruptcy filing, it is not subject to the bankruptcy discharge, so you will be personally liable for the debt after your bankruptcy case is over. Be warned, however, that any lender who offers to finance a vehicle for you immediately after filing for bankruptcy protection is likely offer extremely high interest rates and the strictest of terms within the financing agreement. Maintaining this payment after your bankruptcy can help rebuild your credit more quickly, but defaulting on the payment will keep your credit score low for much longer than it ordinarily would after your bankruptcy discharge. Lastly, if you do elect to finance a vehicle after filing for bankruptcy, keep it reasonable. Filing for bankruptcy, then immediately financing a luxury vehicle at a high interest rate with a high monthly payment will raise questions as to your good faith in filing for bankruptcy.
In Chapter 13, you are required to seek court permission to incur debt for a new vehicle (or for any other purpose). The reasoning for this is that you have voluntarily sought protection from the bankruptcy court and submitted a repayment plan that is supposed to account for all your disposable income. The court will require that you prove that that you are able to afford this new payment while maintaining your existing obligation under the Chapter 13 plan and that it is actually necessary for you to incur the debt to effectively reorganize. Your selection of the vehicle to be financed along with the terms of the financing will be closely scrutinized.
That said, sometimes you have a very good reason to incur credit for a new vehicle:
- Your existing vehicle has significant mechanical issues and it is not worth the money to repair it.
- Your existing vehicle has been in an accident and is a total loss and you are using the insurance proceeds to acquire the new vehicle.
- Your household situation has changed, such as obtaining a job that requires a reliable vehicle.
If it is reasonable for you to incur the credit for the vehicle and you prove that you can afford the new payment, even if it requires you to modify your Chapter 13 repayment plan, the court will generally approve it.
On a final note, there is another option available if your vehicle is a total loss in an accident. Your lender and insurance company can agree to provide a “substitution of collateral” instead of you having to finance a new vehicle. Basically, you find a vehicle of substantially similar value to the one that was totaled and it replaces the totaled vehicle under the terms of the existing financing agreement. While the administration of this option can be a bit more challenging, and it also requires court approval, executing a substitution of collateral will allow your budget and your Chapter 13 plan payment to remain consistent.
