You may want to consider buying a car prior to filing your Chapter 13 bankruptcy case.
Filing bankruptcy isn’t a matter of going to your bankruptcy lawyer’s office, plunking your money down, and signing a few documents. It involves planning.
First, there’s the obvious need to determine what chapter you should file under–typically 7 or 13, but, in a few instances, it could even be 11. Second, you and your lawyer need to do some bankruptcy planning, and in this post I’ll discuss planning for Chapter 13 by buying a vehicle.
Chapter 13 bankruptcy–if you’re over median income (using the six-month average prior to filing)–is a five-year process. If you have an older car, you’re probably better off replacing it prior to filing. If it dies or begins “nickel and diming you to death” during your bankruptcy, you’ll need to file a motion to incur debt. You’ll have to make the case for needing that newer vehicle, and getting an order entered will take about a month. It’s a hassle, and a hassle you probably won’t want to deal with if your transmission just failed or the vehicle can’t be driven because of some major mechanical failure.
Buying a car will also help you on the means test, which determines how much you’ll need to pay to your unsecured creditors in your plan. No car payment means no ownership allowance on the means test. That, in turn, means (pardon the pun) that you lose $662 on the means test.
You must be mindful of how the purchase will look to the Chapter 13 trustee and, more importantly, the bankruptcy judge
Am I saying you buy the car to do better on the means test? No. But if you need a car, it’s best to take care of that prior to filing. And if that helps you on the means test, well, so be it.
Buy a high quality used car, and be sure you need to buy a vehicle. For example, if you have a 2020 model vehicle with 60,000 miles on it that you just paid off, I would not advise you to buy a newer car prior to filing. In contrast, however, if you own a 2014 with 180,000, I would. As Justice Potter Stewart would likely say, I can’t define it, but I know it when I see it. An experienced bankruptcy lawyer can help you through this process.
I don’t advise my clients to buy luxury brands like Mercedes and BMW to name a few. I just don’t like how this sounds: “Your Honor, the debtor purchased a new BMW two months prior to filing this case.” Sure, maybe it’s a 2018 with 70,000 miles. Maybe it was even a good deal. But I can’t get over how it sounds. And as for many of these luxury brands, they tend to be unreliable and extremely costly to maintain. If you’ve gravitated to brands like that to keep up with the Joneses, now is a good time to reset your thinking. Conspicuous consumption might have gotten you in this mess. It’s now time to adjust priorities.
Always talk to your bankruptcy lawyer prior to making a car buying decision . Bankruptcy is very different from one district to another, and even different in each division within each district. Always clear any buying decisions with an attorney who’s familiar with your bankruptcy trustee and judges.
