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There are a few circumstances where buying a car before bankruptcy might make sense. If you can buy a car without an auto loan or are able to qualify for an auto loan that is under your state’s exemption limit, it should be protected from bankruptcy proceedings. But ultimately, this is a discussion to have with a bankruptcy attorney who can walk you through your situation and state regulations.
Factors to consider when purchasing a car before bankruptcy
You can buy a car before bankruptcy, but it’s not always the best course of action. Depending on your access to other forms of transportation, the value of the vehicle and your ability to secure a loan, you may want to go without until you’re in a better financial position.
Whether the vehicle will be protected
The bankruptcy trustee or your lender will likely require you to reaffirm your debt, meaning you will continue to make payments on it as you did before filing for bankruptcy.
That being said, your car will be protected from repossession during bankruptcy if its equity doesn’t exceed federal or state exemptions. However, you must continue to make payments according to your loan agreement — either the original or revised contract — in order to avoid default and repossession after bankruptcy.
The equity is determined by the car’s value compared to the amount you owe. When you’re looking for vehicles before bankruptcy, ensure your equity won’t exceed the exemption amount — either $4,000 or a limit set by your state. If the car you buy does, you may be forced to sell it to pay off other creditors.
Type of bankruptcy being filed
Chapter 7 bankruptcy does allow you to keep your vehicle if it is under the exemption limit. So if you are considering Chapter 7 bankruptcy, ensure that the vehicle you purchase is worth less than your state’s exemption limit. If it is above the exemption limit, your car could be repossessed and sold to cover your debts if you can’t pay the difference.
Chapter 13 creates a payment plan for your current debts, including anything you owe on the car. If you can’t repay this, you’ll need to sell the car yourself or turn it back over to the lender.
You can also reaffirm the loan and keep it out of the bankruptcy process entirely. As long as you can continue making payments as agreed upon, you will not lose your vehicle to repossession.
Alternatives available in your area
Finally, consider the alternative options for transportation in your area. If your current car is on its last legs and you don’t have access to reliable transportation, buying a car might be a necessity.
However, living somewhere with reliable and affordable — compared to a car payment, maintenance and insurance costs — public transportation may mean you can get by without a vehicle during bankruptcy, especially if you can’t find a vehicle that is valued at less than your state’s exemption amount. Ride-sharing and friends may also be able to cover your needs. In this case, it could be worth holding off even if buying a car won’t disrupt the bankruptcy process.
How to buy a car during or after bankruptcy
At a high level, the exact steps will depend on when you choose to buy your car and if you need to finance it. Buying a car during or after bankruptcy isn’t unheard of, but you’ll want to stay on top of things to keep on the right side of the law.
Buying a car during bankruptcy
The biggest issue with buying a car during bankruptcy is the money used as a down payment. Nonexempt cash that should go to your creditors can’t be used to fund your vehicle. When you file your bankruptcy paperwork, the court may see a large down payment as an attempt to evade paying your creditors. Fortunately, it’s unlikely to cause problems if you make a small down payment to buy an inexpensive vehicle that you can prove is a necessity.
In addition, your lender may request that you sign a reaffirmation agreement to remove your new loan from your bankruptcy filing. The most difficult part will be finding a lender that will work with you. It’s not impossible, but it can be hard.
If you plan to purchase your car outright without financing, you may face the same issue as if you made a large down payment. It’s important to keep your attorney filled in on the process so they can guide you toward a legal purchase during bankruptcy.
Buying a car after bankruptcy
It’s not impossible to buy a car after bankruptcy, but it will be expensive. Lenders see bankruptcy as a significant risk. Your interest rate will reflect this risk, and you may end up with rates upward of 20 percent. You may also be approved for a smaller amount of money, limiting the type of car you can afford to buy.
But it’s not all bad. There are some dealerships and lenders that work with people who have declared bankruptcy. And if you are approved for a loan, on-time payments can help you rebuild your credit score. This will make it easier to afford a less expensive loan in the future or refinance your auto loan later on.
The bottom line
If you truly need a car and can find one that costs less than your state’s exemption limit, buying a car before bankruptcy may be a smart move. It’s easier to find financing without bankruptcy on your record. However, discuss a big purchase like this with your bankruptcy attorney first. Your attorney will understand your unique situation and be able to guide you through the specific laws and regulations in your state.