Filing for bankruptcy can have a serious impact on your finances, but it doesn’t mean that you can’t purchase a car. In fact, it is both possible and even advantageous to buy a car after filing for that Chapter 7 or 13. Keep in mind, however, that bankruptcy courts impose certain limitations on car purchases. Your new car must be considered a necessity; any other motive could end up with your car being seized or even your case dismissed.

Buying a Car with Cash before a Bankruptcy Filing

If you are planning on filing for bankruptcy, be sure to speak with a lawyer before buying a car. In general, filers are advised against incurring more debt before filing for bankruptcy. Paying cash for a car can also have a negative impact on your situation, so you’ll want to be cautious about buying a car or other large purchase right before your Bankruptcy filing.

Buying a car can be beneficial for some Chapter 7 filers. If you need to purchase a new car, and have recently filed for bankruptcy, talk with your lawyer and court-appointed trustee – they’ll know of any possible benefits to your case and can help make sure your car won’t be considered a purchase for the wrong reasons.

If you do need to buy a vehicle right before filing for bankruptcy, look into the laws in your state. Most states will allow filers to keep their vehicles as “exempt” property that can’t be sold to repay creditors, but only as long as their car’s equity doesn’t exceed a certain amount. Because funds in your bank account are hardly ever covered under “exempt” property laws, buying a car before Chapter 7 filing can actually help protect your finances. But again, this car purchase MUST be considered a necessity.

No matter how “necessary” your car purchase may seem, always consult with your court-appointed trustee first. He or she will help you verify that your vehicle was bought “in good faith,” not to avoid paying lenders. Some things your trustee will look into include:

  • The cost of the car. Is the vehicle a new luxury model, or an affordable used model?
  • When the vehicle was purchased. Was it hours before filing (which could be a red flag), or a couple months prior?
  • Other vehicles. Do you already own a usable, drivable car?

Buying a Car before Bankruptcy Filing with an Auto Loan

Again, buying a car before filing for bankruptcy must be done carefully and is only beneficial in certain circumstances. Remember, bankruptcy is about eliminating or reducing debt, so taking on an additional financial burden (like a new or used car) can seem suspicious. If, however, you really do need to purchase a car and don’t have the cash to pay for one in full, financing will be your only option.

Fortunately, buying a car with auto financing before bankruptcy can also be beneficial for some filers. For Chapter 7 bankruptcy, for example, filers must make below a certain net income to pass a “Means Test.” If your net income is just over the threshold, the deduction from your auto financing may be just enough to bring your net income down and allow you to qualify for Chapter 7.

Having a car loan can reduce the amount of money that they’ll owe in their repayment plan. The court will be less than pleased if it appears that you’ve taken out an auto loan just to cheat your creditors.

For debtors filing for Chapter 13, having auto financing on their record can help reduce their monthly repayment plan amount.

If you do need to purchase a vehicle before filing for bankruptcy, be aware that most lenders will hesitate to work with you if they find out a Chapter 7 or Chapter 13 filing is imminent. If granted, your bankruptcy can force lenders to “pack down” the car loan, meaning you’d only need to pay for the cash value of the car, not it’s financed value. This almost always means your auto lender will lose money in this situation, which of course they do not want.

Buying a Vehicle after or during Bankruptcy Filing

Despite some of the possible benefits of buying a car before filing for bankruptcy, it’s always best to wait until after you file, unless you absolutely can’t afford to wait. It’s also best to purchase your car with financing, rather than cash. With bankruptcy on your financial record, you’ll want to get started repairing your credit right away, and an auto loan is one of the best ways to build damaged credit.

In the case of a Chapter 7 filing, ideally, you should wait until you have your discharge papers. A Chapter 7 bankruptcy typically only takes a few months to complete. And most dealerships prefer to work with Bankruptcy buyers who have been discharged.

For Chapter 7 filers, it’s best to wait on buying a car until the discharge papers have been received, usually three or four months after filing. Not only does this help build damaged credit, it also increases your options. Dealerships are much more willing to serve bankrupt buyers who have already been discharged.

Chapter 13 bankruptcy is a much longer process, as many as five years. If you need a car during this period, don’t worry. It is possible to finance a car during this time. Just make sure to follow the approval process carefully.

Buying a car before, during and after filing bankruptcy is possible, and in some cases even beneficial. Talk with your trustee about your options and how best to proceed. If done properly, you can enjoy a nice vehicle and rebuild your credit quickly.

Car Loans & BankruptcyFor people considering bankruptcy, one of the biggest fears is:

“What will I do about a car?”

You likely believe that once you declare bankruptcy, you will have a hard time qualifying for an automobile loan. Our eBook with walk you through everything you need to know about buying a car during and after bankruptcy. Learn about your options so you can make the best decision for your circumstances.

Automotive Fresh Start Center, LLC is NOT a debt relief agency, as defined in section 101(12A) of the Bankruptcy Code. We do not provide bankruptcy assistance. The articles, videos, images, digital products, and other content maintained on this site as well as the opinions voiced in this material are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. No information on this site constitutes legal or financial advice and should not take the place of consulting with a licensed bankruptcy attorney, debt relief agency, or certified financial advisor.