Can I Buy a Car While in Bankruptcy?

used cars signYes. Many people ask us this question. After all, a lot can happen in the 5 years while a Chapter 13 case is active. Cars break down, get wrecked, and sometimes you need a replacement. There are two aspects of the process: finding the car you can afford (and the credit to buy it) and getting court approval.

The easiest way to get a car in Chapter 13 is to simply pay cash for it.  If you scrimp along on ramen noodles and ham sandwiches for a year to save money to buy yourself a paid-for clunker, then you have done the smart thing. You don’t need credit or court approval. Congratulations on being in the top 1% of the financial intelligence spectrum.

But for most people, the car you want costs more than what cash you have on hand. So what do you do?

1.  Find a Deal. Go car shopping. Find a car you can afford.  Make the biggest down payment you can (this reduces the finance charges you’ll ultimately pay by thousands). Once you have the terms of the deal nailed down (price, amount financed, interest rate, make & Model, etc.) take that information to your attorney so he can file the motion to obtain court approval.

2.  Obtaining Bankruptcy Court Approval for the Loan. You cannot borrow money without bankruptcy court approval. Judges don’t like it when debtors come to them seeking even more debt, but they realize that you need transportation, so if your request is reasonable, they’ll likely approve it if you meet a few basic criteria:

a) You actually need the vehicle. You cannot buy a brand new sports car or a BMW unless you’re already paying all of your creditors 100% of what they are owed. So don’t even try.

b)  You can afford it. You must be able to show the court that you can afford the payments on the vehicle. This means that you must be current on your bankruptcy payments, and that you make enough money to cover the additional expense. If you are constantly late with your bankruptcy payments or have missed some recently, you will get denied. You may need to submit an amended Schedules I and J (income and expense sheets) to the court as proof of your ability. The Trustee may object.

c) It is not a total ripoff. 25% APR is a ripoff, and a horrible idea. Judges are sometimes wiser than you, and they will sometimes refuse to approve your horrible financial decision, no matter how badly you want to waste your money. If you cannot find an interest rate under 20%, shop smaller, save cash for a down payment, or find a co-signor.