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How to Buy a New Car While in Chapter 13 Bankruptcy

car loan photoASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

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

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.

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Negotiating With the Bankruptcy Trustee to Buy Back Nonexempt Cars


Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

Help! I filed Chapter 7 bankruptcy, and I have run into big trouble with the bankruptcy trustee. I have three cars (all nonexempt) that I want to keep if I can reach a fair deal to buy them back from the trustee. I have a 1986 Toyota pickup (hunk of junk), 1991 motor home (hunk of junk,) and my main vehicle which is a 2006 Toyota RAV 4.  The trustee and I agree that a fair buyback amount for the RAV 4 is $7,000. But the trustee insists I must also buy back the two other vehicles in an all or nothing deal, for $21,000. Can the trustee insist that I do this in order to get my RAV 4 back? Is there anything I can do?  

— Stanley

Dear Stanley,

There are things you can do. But first you should understand the bankruptcy trustee’s role and obligations. First, the bankruptcy trustee has the discretion to use “ordinary business judgment” when it comes to selling assets. This allows a trustee to decide the best way to sell a group of assets — individually or as one lot. A trustee also has a duty to maximize the money and assets in your bankruptcy estate by selling nonexempt assets for the best price possible.  (To learn how Chapter 7 bankruptcy works, the difference between exempt and nonexempt property, and more, see Nolo’s Chapter 7 Bankruptcy area.)

A trustee can’t legally give anybody a ”sweetheart deal.” A trustee also has the discretion to abandon any nonexempt assets (which mean they go back to the debtor) where such assets have “inconsequential value.”

Here, the trustee may feel that the value to the estate is maximized by selling everything in one single lot, the same way delinquent storage lots are sold to the public, ”winner take all.”

However, the trustee may believe your “junk” cars have no real value, and is playing poker with you to get a better price. You may have some good cards of your own to play.

Negotiate With the Trustee

You can make a counteroffer to the trustee.  For example, in this situation I might tell the trustee that my client will not pay more than the $7000 already offered; if the trustee doesn’t accept this offer within 24 hours, it will drop to $6000; and if not accepted at all, the trustee can come pick up the whole kit and caboodle immediately.

If the trustee is bluffing to squeeze more money out of you, this might force the trustee’s hand.

Bid at the Auction

If the trustee proceeds to offer the vehicles for sale, it is typical that the vehicles will be towed away to an auction yard.

Guess what? You are entitled to bid at the auction. You can attend the auction with your $7000, and bid under the same bidding rules as anyone else.

And you might even be able to buy the RAV 4 for far less than the $7,000 you originally offered. Here’s why. Bidders at these auctions typically inspect the items, but are not allowed to take a test drive and aren’t even allowed to start the engines. Items are sold ”as is.” This works to your advantage because other buyers can’t really be sure of what they might be buying.

You alone know the actual mechanical condition of each vehicle. That gives you a tremendous bidding advantage. At the price point where strangers will stop bidding, you may keep bidding confidently and win the auction because you know what you are really getting. At the end of the day, you may come out a very big winner, and the trustee may learn not to be so darn cocky.

Best of luck to you, Stanley!

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.  

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.