Should you consider trading vehicles prior to filing chapter 13 bankruptcy?

August 2, 2013

Although common sense might lead you to believe that it is a bad idea to acquire a new loan for a vehicle prior to filing bankruptcy, this may not be true in many situations.  Consult with your bankruptcy attorney and consider these issues:

First, there is no per se violation for acquiring a new secured debt prior to filing bankruptcy, so long as it is done “in good faith”. Generally, that means that you had a legitimate need for another vehicle. Perhaps your current vehicle is older and beginning to have mechanical difficulties. If you anticipate the cost of repairs to be significant, it may not make sense to spend a lot of money on repairs on an older vehicle.  Of course, you should also consider whether you need to purchase a vehicle at all.  The availability of public transportation in your area may make it unnecessary to actually own your own vehicle, but there are many areas of the country where public transportation is not a practical option.  As such, virtually all bankruptcy Trustees recognize that being a reliable worker requires having reliable transportation.

“Good faith” also means purchasing a vehicle that is within your needs and within your means.  Obviously, you should avoid purchasing vehicles that are considered luxury brands, but you should also select a vehicle that fits your needs.  There is usually no need for an SUV type of vehicle if you don’t have a family, and if you have to commute long distances it would be wise to purchase a fuel efficient car.

Another consideration is whether you believe your current vehicle will continue to be reliable throughout the term of your bankruptcy. This is important because once you file your bankruptcy case most Trustees and Courts won’t allow you to incur any new debt without first getting permission from them.  Therefore, assuming you will need to finance the vehicle, you can avoid this permission issue by purchasing the vehicle prior to filing. Furthermore, it is easier to obtain credit from a lender when purchasing prior to filing. Many lenders refuse to lend at all if you are already in a bankruptcy case.

Finally, if you believe that purchasing another vehicle prior to filing is the right option for you, then consider these issues when acquiring the loan.  First, be truthful on the loan application. Most lenders are going to be surprised if you file for bankruptcy protection shortly after acquiring the loan, and if they re-examine your application after that and determine you provided false or misleading information, they can ask the bankruptcy Court to set aside (undo) the financing transaction.  Or even worse, they may be able to bring a legal complaint against you for providing fraudulent information on your loan application. Also, it is usually not a good financial decision to purchase financing extras; such as credit life insurance in this type of situation. The attorneys at Fears Nachawati would be happy to guide you and advise you on what your best course of action is.

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