Being in Chapter 13 also means that you must play by the bankruptcy court’s rules. One rule is that you may not use credit during the bankruptcy case. So what happens if you need to replace your vehicle during your bankruptcy case?
Buying with cash
A bankruptcy debtor may buy a car with cash during an open Chapter 13 case without permission from the trustee or bankruptcy court. There is one caveat: if your bankruptcy plan requires you to pay all disposable income to the trustee for the benefit of creditors, you may not use a bonus check, tax refund, or other irregular income unless you have permission from the trustee. As always, it is advisable to speak with your attorney before making a large cash purchase during Chapter 13 bankruptcy.
Getting a loan during Chapter 13 bankruptcy
Financing a car loan during bankruptcy requires a few steps. Since the monthly payment must be approved by the trustee and bankruptcy court, the first step is to ask your attorney what the trustee will ordinarily sanction. Your attorney will first contact the trustee to receive consent. After that, you and your attorney should start the process of obtaining court approval by filing a written motion. Your motion will include the following information:
– Why you need to purchase a vehicle
– Are you trading in a vehicle
– How much you plan to spend
– How much you will put down and amount financed
– The approximate amount on monthly payments, term, and interest rate
– How the new payment will affect your Chapter 13 plan.
The motion will request that the court issue an order allowing you to proceed with the purchase and financing of the vehicle based on the terms outlined in the motion. You may also need to modify your Chapter 13 Plan. In some cases you may be able to reduce the amount paid to unsecured creditors in order to afford the new car payment. Your attorney may also need to amend your bankruptcy schedules.
Once you receive the court’s permission, you can go car shopping! Unless you have already obtained financing, you will need to seek a loan from one of the car dealer’s lending sources. This often requires substantial leverage and influence, so generally dealing with a large dealer is preferable over a smaller dealership. Larger dealerships are often better at overcoming difficult credit issues, such as an open bankruptcy case. It may also be worth a telephone call to the dealership to discuss your situation before actually visiting the lot.