Should You Buy a Car Prior to Filing Chapter 13?

You may want to consider buying a car prior to filing your Chapter 13 bankruptcy case.

Filing bankruptcy isn’t a matter of going to your bankruptcy lawyer’s office, plunking your money down, and signing a few documents. It involves planning.

First, there’s the obvious need to determine what chapter you should file under-typically 7 or 13, but, in a few instances, it could even be 11. Second, you and your lawyer need to do some bankruptcy planning, and in this post I’ll discuss planning for Chapter 13 by buying a vehicle.

Chapter 13 bankruptcy-if you’re over median income (using the six-month average prior to filing)-is a five-year process. If you’ve got an older car, you’re probably better off replacing it prior to filing. If it dies or begins “nickel and diming you to death” during your bankruptcy, you’ll need to file a motion to incur debt. You’ll have to make the case for needing that newer vehicle, and getting an order entered will take about a month.

Buying a car will also help you on the means test, which determines how much you’ll need to pay to your unsecured creditors in your plan. No car note means no ownership allowance on the means test. That, in turn, means (pardon the pun) that you lose $517 on the means test.

You must be mindful of how the purchase will look to the Chapter 13 trustee and, more importantly, the bankruptcy judge

Am I saying you buy the car to do better on the means test? No. But if you need a car, it’s best to take care of that prior to filing. And if that helps you on the means test, well, so be it.

Buy a high quality used car, and be sure you need to buy a vehicle. For example, if you have a 2008 model vehicle with 60,000 miles on it that you just paid off, I would not advise you to buy a newer car prior to filing. In contrast, however, if you owned a 2004 with 150,000, I would.