Notify lender of bankruptcy

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Dear Bankruptcy Adviser,
I am in the process of filing Chapter 7 bankruptcy. I have a car I am financing that is in need of repair (about $7,000 worth — the car is only worth $5,000 and I owe around $10,000). I have been looking at used cars in my area to finance. Is this a wise move since I am just about to file bankruptcy? I need a car to go to work.


Dear Gillian,
Whether you are making a wise move or not depends entirely on the kind of car you get. Perhaps it would help to look at your situation through the eyes of a bankruptcy trustee.

The trustee is the person assigned to your bankruptcy case. He or she makes the recommendation whether you should be entitled to bankruptcy relief. He or she is looking to see if your financial records indicate that you’re genuinely trying your hardest or if you’re being fraudulent in any way.

However, before even buying a new car, you might be able to eliminate some or all of the remaining car balance. Without going into great detail, if you meet specific guidelines, you can possibly have the car balance reduced to the fair market value. Meaning, if you owe $10,000 on the car that is worth only $5,000 and you file bankruptcy, then you could be eligible to eliminate $5,000 of the car balance.

Going back to your initial question, suppose you file for bankruptcy and they look at your petition. They see that you bought a car. When you go to court, they may ask you, “Why did you buy this car when you knew you were going to file for bankruptcy?”

Buying a new car may make you eligible for bankruptcy relief when you might otherwise not qualify, but under the new bankruptcy laws, it is illegal for an attorney to advise a client to incur new debt prior to a bankruptcy filing. In addition to helping you qualify for Chapter 7, you would get a better car and your creditors would get the short end of the stick.

Now, this does not mean that it is illegal to buy a reliable, used car? In your case, unless you have the $7,000 available to fix your car, you will not be able to pay for the repairs. For all practical purposes, your car is totaled. All you need right now is the ability to get to work safely and reliably.

Gillian, if you do elect to get a reliable used car, make sure that the lender for the new car is notified of the bankruptcy. You may need to sign a reaffirmation agreement, which means that you will be responsible to pay back the car loan after your bankruptcy case is closed. This will also help you rebuild your credit rating.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the ” Ask the Experts” page, and select “bankruptcy” as the topic.