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Buying a car during Chapter 13 bankruptcy

Dear Bankruptcy Adviser,
We filed Chapter 13 in March 2005. It went to court in August, and we have money taken out of my husband's check to the courts. Now I have a job and am in need of a car. When we called the trustee, we were told we may have to up the payment? I only make so much money to pay for food, gas and a small car note, and now we are in the same boat as before. Who will help finance us with a repo and bankruptcy? Do you have any advice?
-- Lucille

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Dear Lucille,
Lucille, let's take a moment and focus on the positive. You and your husband received confirmation of your Chapter 13 bankruptcy successfully, and you've gotten a job. Yes, you're still under enormous financial pressure to make the ends meet, but you continue to succeed. Many do not. So first, give yourself credit for making it this far.

The basic structure of Chapter 13, Lucille, is that you agree to pay what you can for three to five years in return for having a large portion of your debt wiped away. Therefore, it makes sense that you would need trustee approval before taking on additional debt -- such as a car payment. As well, when you get a new job, what you're able to pay increases. This is why you had to notify the trustee after getting the job, and if you haven't, you need to do that ASAP.

The goal of the trustee is to help you stay afloat while preventing abuse of the system. This is why you will very likely be able to buy a car -- just not a Mercedes-Benz with a $1,000 monthly payment. The trustee is much more likely to allow you a payment of $200 to $250 per month for a car note.

Now, a car creates additional expenses, such as gas costs. When you talk to the trustee, you will have to present a new accounting of your income and expenses. You'll show pay stubs from your new job and your expenses estimate will be reviewed by the trustee, whether or not it was prepared by an attorney. The trustee will scrutinize it carefully and challenge anything excessive, unreasonable or out of the ordinary -- so prepare your facts carefully. If you drive a lot, you may want to bring in gas receipts to demonstrate your commuting expenses.

The hardest part may be actually finding a car that you can finance. In general, lenders do not want the payments or interest rates to be reduced by your Chapter 13 plan -- but if you are diligent, you can find a company that has a car that they'd love to get off of their lot and will meet your transportation needs. Here's what I'd do: Call every dealer in your area and explain that you are in a Chapter 13 bankruptcy for the next three to five years and that you need a car.

Had you bought the car before filing for Chapter 13 bankruptcy, the exorbitant interest charged by the dealer when you first bought the car will be lowered in the Chapter 13 plan by the trustee. However, your interest rate on the new car you need to purchase could be very high. This means you will need to find a very modest car to buy, that is in good shape with a payment between $150 and $250 per month.

Used cars, however, can become financial black holes, Lucille, so be careful. Check consumer guides and choose a car based on reliability above all else. You don't want a car to break down and throw a wrench into your delicate financial recovery.

Justin Harelik is a practicing bankruptcy lawyer in the Los Angeles office of Price Law Group. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "bankruptcy" as the topic.

Bankrate.com's corrections policy -- Posted: Oct. 1, 2005
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