Many people are surprised to learn it’s possible to purchase a vehicle during Chapter 13. Bankruptcy law recognizes that few people can manage their daily lives without some form of transportation.
The law also recognizes that your current car may not list throughout the entire two to five year period during which you’d be making Chapter 13 payments.
However, the right to buy a new vehicle is not automatic under Chapter 13, since you would be taking out a new debt while attempting to manage the old ones. There are certain steps you’ll have to take to obtain the legal right to take out a lone. You may also have to work a little harder to find a lender who is willing to work with you.
Obtaining trustee approval.
When you want to purchase a vehicle during your Chapter 13 bankruptcy your trustee’s job is to make sure the decision won’t keep you from making your payments. If you’ve been struggling to make payments for some time then he or she is unlikely to approve the plan.
If you’ve been current and can demonstrate that you can make the car payment and the Chapter 13 payment you’re much more likely to obtain approval. Keep in mind the trustee has the right to place limits on your payment amounts.
Finding a bankruptcy-friendly bank.
There are a surprising number of lenders willing to work with borrowers who are embroiled in a Chapter 13 bankruptcy. You’ll have to find one of them.
“Bankruptcy friendly” might not be enough to get you the loan. You can generally smooth your path by having at least a little down payment available. Most banks are more willing to lend to you when you’ve got some kind of “skin in the game.”
Keep in mind the loan won’t be great. This will be a subprime loan with high interest rates. This car also won’t be protected by the automatic stay like your other debts, since you’re incurring this debt while working through a bankruptcy. If you don’t make your payments on time you’ll face repossession.
If you can save up a down payment it might be smarter to save a little more cash so you can just buy a less-exciting car with cash. If you can find something that will last until your discharge you might be in a better position later.
Filing the Motion to Incur Debt in Chapter 13.
When you work with the lender ask them to work up a proposed loan document with solid numbers attached. You’ll need this to properly file your Motion to Incur Debt.
The trustee will examine the proposed loan and will make a decision. If the trustee rules in your favor you’ll be given a court order which will allow you to finish the process.
You’ll need to work closely with your bankruptcy attorney throughout the process to maximize your chances of success. If you’re contemplating Chapter 13 but haven’t filed yet, remember that there is less than a 1% chance of successfully navigating the process without an attorney’s help.
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