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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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Borrowing From a Retirement Plan During Chapter 7 Bankruptcy


Bankruptcy expert Leon Bayer answers real-life questions.

Dear Mr. Bayer,

I recently filed for Chapter 7 bankruptcy and have a hearing date set.  I work for the State of California and have a §457 Retirement Plan.  I want to borrow money from the plan to pay for a divorce attorney. Will borrowing from my §457 plan affect my bankruptcy? According to the plan, this would be a refinance since I borrowed money from it last year.

Thanks for your help.

—  Lenore  

Dear Lenore,

I am sorry that you have to deal with a bankruptcy and a divorce all in the same year. On the other hand, maybe it’s best to get both of these over with at the same time, so you can start out next year with a new beginning.

Here is the answer to your question. If your §457 plan is willing to let you take this loan, I believe that you can go ahead and do so. If you are represented by a lawyer in your bankruptcy case, I recommend that you show this to your own lawyer for an opinion before acting on this.

Here is the reasoning behind my answer.

 §457 Retirement Plan Funds Are Not Part of the Bankruptcy Estate

Your California State Employee’s IRS Code §457 Retirement Plan is not property of your bankruptcy estate. Even if it was, it would qualify for an exemption. (To learn how exemptions help you protect property in Chapter 7 bankruptcy, see Nolo’s  area on Bankruptcy Exemptions.)  Since the money in your Plan is protected, if your Plan administration will allow you to take the loan, you can do so.

(Learn more about what property is not in your bankruptcy estate, and what that means for you.)

Money Earned Since Your Chapter 7 Filing Is Not Part of the Bankruptcy Estate

The money that you earn after the date you filed your Chapter 7 case is likewise not property of the bankruptcy estate. Therefore you are entitled to spend your current earnings to make the required loan payments.

Court Approval Required in Chapter 13 Bankruptcy

However, if this was a Chapter 13 case, my answer would be different. The required loan payments would reduce the disposable income of someone in a Chapter 13 case, and thus court approval would be required. (Learn more about  Chapter 13 bankruptcy and disposable income in Chapter 13.)

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.

Find Leon on Google+