A consistent issue during a Chapter 13 bankruptcy is the need to maintain an operable car throughout the 3-5-year process.
Engines and transmissions fail. Wiring degrades. Light fender-benders can result in a mechanic’s verdict that your older model car is not worth replacing.
What are your options when that happens during a Chapter 13 bankruptcy proceeding?
Some people can manage by using a family member or friends’ car. Some people use cash to purchase a car. However, the most likely option when confronted with the need to find alternate transportation is to buy replacement car.
In a Chapter 13, however, you are typically required to obtain court approval if you are planning on financing purchase of a new or used vehicle.
Your monthly Chapter 13 plan payment is premised upon the average income and the average necessary household expenses you had on the day that you filed.
The Chapter 13 payment plan that you drafted and filed with your bankruptcy attorney accounts for the debt that you owed prior to the filing of your bankruptcy case—but not after.
Any change in your budget—such as a new car payment—will mean that your plan payment is now potentially unaffordable.
Any new and non-dischargeable, post-filing debt obligations will threaten the priority order of debt payment cemented in place by the Confirmation Order issued by your Bankruptcy Judge.
Your creditors cannot be paid less than was previously approved to be paid because you decide to buy a new Porsche.
The Bankruptcy Court and the Chapter 13 process, however, do recognize your need of a reliable vehicle.
Just not a Porsche. It will want to ensure that it is a normal, non-luxury vehicle—with what it believes to be a normal car payment. (This will vary from jurisdiction to jurisdiction.)
Therefore, the court must review the specifics of the car you wish to purchase and the terms of the post-filing vehicle loan to ensure that the purchase is reasonable.
How do you garner the Bankruptcy Court’s approval for a new car purchase in Chapter 13?
You will first go shopping.
Just as if you were not in a pending Chapter 13 bankruptcy case, visit some local car dealerships or lots. Look around.
Find the car you want to buy.
Then meet with the dealership’s finance manager to discuss your interest—and the fact that you are in a confirmed Chapter 13 bankruptcy proceeding.
You will need to obtain from the dealership the proposed purchase agreement, or a term sheet or other document that bullets out the following:
The year, make, and model of the vehicle in question;
- The total amount to be financed;
- The interest-rate;
- Any down-payment to be made;
- And the monthly payment amount.
If obtaining the full purchase agreement with these terms included, remember—no matter what the car salesperson tells you—don’t sign it.
You don’t have court approval to do that yet.
If the dealership or finance manager don’t know anything about Chapter 13 and will not provide you such documentation or insist that you simply sign on the dotted line and buy the car without the necessary court approval—find another dealership that is familiar with Chapter 13.
Once you have it from a knowledgeable dealer, email, fax it, or deliver it without signatures to your bankruptcy attorney.
Depending on local practice in your Federal court jurisdiction, your attorney may work with your Chapter 13 Trustee to stipulate to an order approving the loan and/or file a motion modifying your Chapter 13 Plan with the goal of obtaining that order after the Trustee and creditors are noticed.
That purchase agreement or other term documentation obtained from the dealership will be the Exhibit to your attorney’s motion.
It sounds very cumbersome, but it is, as far as Chapter 13 motion-practice goes, an expected if not routine aspect of many Chapter 13 bankruptcy cases.
The problem, however, is often that the vehicle you wish to purchase, and which is reflected in the documentation provided to your attorney will likely not still be on the lot by the time court approval is received.
Depending on you Court, the Order may read something like the following:
- The Debtor is authorized to purchase a car;
- Similar to [whatever the vehicle was in that documentation provided to the court];
- With a purchase price not to exceed [whatever the amount was in the documentation];
- With an interest-rate not to exceed [the interest-rate reflected in the documentation];
- And with a monthly payment not to exceed [the amount of the payment reflected in that documentation].
In that way, the court order contains guidelines but is not specific to a particular, individual vehicle that may no longer be for sale.
That court order will allow you to go back to the dealership to simply purchase something similar within those financial boundaries.
The entire process will typically take about 30 days.
There are some emergency situations in which that timeframe can be accelerated, but those circumstances are extraordinary.
For example, if you need to get to work to earn money to fund the Chapter 13 plan and are entirely without a vehicle and reliant upon family members or friends to ferry you back and forth, your attorney may be able to file a Motion for Expedited Hearing.
However, your attorney will need to demonstrate with documentary evidence that the motion is filed with cause. In other words, that you have a bona fide need to hurry things up.
Again, Bankruptcy Courts in different areas of the country will have different processes for the purchase of vehicles in pending Chapter 13 cases.
If you are in a Chapter 13 proceeding, discuss the specific process in your jurisdiction with your local bankruptcy attorney.
If you are a resident of Tuscaloosa, Jefferson, Bibb, Fayette, Walker, Blount, Pickens, Green, or Sumter County and are considering filing for Chapter 7 or Chapter 13 bankruptcy, contact us to discuss your options.