Bankruptcy expert Leon Bayer answers real-life questions.
We have been in a Chapter 13 bankruptcy case for three years – we are on a five year repayment plan. Our car caught on fire and the insurance company declared it to be a total loss. The company offered us $13,000.
What do we need to do in order to buy a new car while in bankruptcy?
Tony and Lisa
Dear Tony and Lisa,
I’m sorry to hear about your car. Life on a Chapter 13 bankruptcy budget is hard even when things go according to plan. When the unexpected happens, it can be very difficult to stay on track. I hope you are able to do so, and finish out your case.
I will assume you didn’t owe anything on your car. If that’s the case, it’ll be easier for you. If you did owe money, you will have to pay your lender the balance due before you get any of the insurance money.
The next step depends on whether you will buy a car with cash, or you need financing.
Buying a Car With Cash in Chapter 13 Bankruptcy
If you are going to buy a car without financing, go right ahead and do it. You don’t need anyone’s permission. I assume you would buy a used car that will cost about the same as you received for the old one. But, if you have the resources to buy a brand new car, or a newer and more reliable car, I see nothing to prevent you from doing that.
Getting a Loan to Buy a Car in Chapter 13 Bankruptcy
If you need financing to buy another car, it’s more complicated. You will need bankruptcy court approval before getting a loan, and of course, you need a willing lender.
Getting Court Approval
I suggest you begin by seeking court approval before you try to buy anything. It will take about one month in order for the court to process the paperwork giving you permission to get financing. A car dealer won’t hold a car for you for that long. Avoid that problem by getting permission first.
To get permission, you must file a written motion with the court. Your motion should tell the court:
- what happened to your old car
- how much you plan to spend on the new car
- how much you will finance
- the approximate amount of the monthly payments, and
- whether your proposal will affect your Chapter 13 plan.
In the motion, you will ask the court to make an order allowing you to proceed with the purchase and financing of a replacement vehicle based on those terms.
A word of warning — be reasonable. Don’t ask the court for permission to buy a luxury car. Your chances of approval are better if you are seeking a newer model in the same class of vehicle as what your old car was.
Shopping for a Car
After you get the court order, you can go car shopping.
Be up front with car dealers. Let them know the challenges you face regarding financing. Of course, by getting the court order first, you make things easier for everyone.
Negotiating With the Dealer
Even with an ongoing bankruptcy case and bad credit, you still have leverage when negotiating with the dealer – the dealer knows that you can walk away and buy a car elsewhere.
Keep in mind that you can negotiate not only the price of the car, but also the interest rate of the car loan. There is almost always room left in the dealer’s first offer to give you better terms. The first offer a dealer gives you is probably not its best offer. (Learn more about negotiating with car dealers.)
Do You Need to Modify Your Chapter 13 Plan?
Next, how will the car payments affect your Chapter 13 plan? Is there money in your budget for the car payment? If not, it may be necessary to seek a court order modifying your plan. Perhaps you will seek to reduce the amount paid to unsecured creditors so that you can free up money that you will need for a car payment. Be mindful that sometimes the amounts paid to creditors cannot be reduced. The same factors that were considered when your plan was originally confirmed will still apply. (Your creditors then, as now, are entitled to receive at least as much money from you as they would have received from your non exempt assets had this been a case under Chapter 7. To learn more see Nolo’s article Unsecured Debt in Chapter 13: How Much Must You Pay?)
Do You Have to Amend Your Bankruptcy Schedules?
The last consideration is whether or not you need to amend your bankruptcy schedules to disclose what happened to your old car, the receipt of the insurance proceeds, and the purchase of a new car. I reviewed the Bankruptcy and the official Bankruptcy Rules. It makes sense that you should be required to update your schedules to disclose any material change to your financial affairs.
Although it would make sense that you should have to update your schedules to disclose changes in your financial affairs, I see nothing in the Bankruptcy Code and Rules that requires you to amend the bankruptcy schedules in this situation. However, old timers like me (I have been handling bankruptcy cases for 34 years) believe that when in doubt, disclosure is the best rule. You can file a simple amendment to your original schedules to disclose everything. If you like you can add a statement that you believe none of the new information is material to the legal rights of any other party, but you want to make such disclosure solely from an abundance of caution.
Leon Bayer is a Los Angeles bankruptcy attorney. He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy. The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo. By answering a question on this blog, Mr. Bayer does not become your lawyer.