Taking on debt shortly before filing for bankruptcy isn't a good idea. It can lead to objections to your discharge and even allegations of fraud in more egregious cases. Whether purchasing a car before or after bankruptcy is in your best interest will typically depend on:
Learn more about prebankruptcy planning to get the most out of your bankruptcy.
If you're considering buying a vehicle without taking out a car loan, you should review your bankruptcy exemptions to ensure you can keep it if you file for Chapter 7 bankruptcy. Most states have a motor vehicle exemption that allows you to protect a certain amount of equity in your car. A Chapter 7 bankruptcy trustee might sell it to pay creditors if you can't entirely exempt the vehicle's value.
In most cases, it's easier to exempt a car's value than to exempt cash or money in the bank. However, converting nonexempt assets to exempt assets shortly before bankruptcy isn't necessarily appropriate.
Before bankruptcy, you can always use your cash for necessary items, such as food, needed clothing, and vehicle repairs. If it's believed that you purchased a vehicle to avoid paying creditors, the bankruptcy court will decide the following to determine whether your car purchase was reasonable:
Talk with a bankruptcy attorney about your particular situation and what the local bankruptcy court allows.
Taking out a car loan to buy a new vehicle shortly before filing your case could lead your bankruptcy trustee to question the purchase in more detail. Typically, a car loan allows you to qualify for Chapter 7 bankruptcy more easily because you can deduct the car payment on the means test.
If you have difficulty qualifying for Chapter 7 bankruptcy without the payment deduction, financing a new car before filing your case can raise a red flag. At your meeting of creditors, the trustee might ask about the vehicle. Unless you have a good reason for buying the car, such as to replace a broken down vehicle, the trustee could argue that you abused the system and purchased the car solely to qualify for Chapter 7 bankruptcy and to avoid paying the equivalent of the monthly car payment to creditors in Chapter 13.
If you need a car and plan to file for Chapter 13, you'll likely want to purchase it before filing because Chapter 13 repayment plans usually last three to five years. While in bankruptcy, you must obtain court permission before taking out a new loan to buy a car—and doing so isn't easy.
You must locate the vehicle and get court approval for the financing. And, if you propose to reduce the amount you pay unsecured creditors to finance the vehicle—which you can do—you risk the additional problem of creditor objections.
You can usually qualify for a car loan about a year after receiving your bankruptcy discharge—possibly sooner. If your income is decent, many car dealers will be willing to finance your purchase despite your bankruptcy. They'll consider you a reasonable financial risk because you'll have wiped out much of your debt in Chapter 7 and won't be able to file again for eight years. However, the interest rate will likely be high.
Learn about multiple bankruptcy filings.