A very common situation that arises for our clients is the need to finance a car while still in a Chapter 13 repayment plan. During the three to five years that you’re making payments on your Chapter 13 bankruptcy case you can’t incur any new debt without getting permission from the bankruptcy court. Many times, clients find that they need to purchase a car either because their old one is giving them problems or they have totaled the car in a car accident. There is no requirement that you have to drive in an old clunker if you are in bankruptcy but you when looking to purchase a new car must stay away from luxury models. Think Honda or Toyota, not BMW or Porshe.
The first step is to make sure you can afford the car payment. Schedule I and J, these are the schedules in your petition which list your income and expenses, must show that you can afford the new car payment. You and your bankruptcy attorney will need to look at your current income and expenses to make sure that there is sufficient money in the budget to pay the plan payment and the new car payment.
The next step will be for you to find a car-dealer who will sell you a car with a monthly payment that fits into your budget. Our clients find a dealership that will finance the car. The car loan will be paid directly to the car dealer, not to the trustee. The contract will be outside of the bankruptcy. Your car dealer will need to provide you with a term sheet that shows the year, make, model, price, interest rate, and term of the loan.
The third step is for your attorney to file a motion to incur debt/ purchase a new or used vehicle with the court. In that motion your attorney will have to state the whole loan amount, the monthly payment and the reason why you need to purchase the new vehicle. You do need to have a reasonable explanation. If the trustee is not objecting and the court grants your motion, your attorney can now submit the order. Within a few days, the court will file the order and you can purchase the car.
What if the car I wanted was sold in the meantime?
The motion should request to purchase permission for the car you want with the monthly payment you can afford and should add that in the case that vehicle is not available that you have permission to purchase a similar vehicle with a monthly payment not exceeding the amount stated in the motion. This way, you are not bound to one specific vehicle in case it is sold before you can get court approval.
Whatever you do, don’t try to purchase a car without the court’s permission. It is illegal and could result in your case being dismissed. Remember, co-signing for someone is still incurring debt so you will need court permission. The courts understand that life happens, but also remember that you need to be as frugal as possible so that you can get out of your case and back on financial track. Every district is a little different in the process so make sure you review with your attorney so as to set the appropriate expectations.