Filing for Bankruptcy or Buying a Car: Which Should Come First?

Buying a car before filing for bankruptcy

Taking on additional debt prior to filing for bankruptcy usually isn’t advisable. Doing so can lead to issues obtaining a discharge or, in some cases, allegations of fraud.

However, a vehicle purchase doesn’t pose a problem with every bankruptcy claim. If you need to buy a car, certain factors – including how you plan to pay and whether you’re filing for Chapter 7 or Chapter 13 bankruptcy – will determine when to make the purchase.

Buying a Car with Cash Before Filing for Bankruptcy

When you file for Chapter 7 bankruptcy in Utah, the court allows you to protect up to $5,000 in the equity of a single vehicle – or up to $10,000, if you’re filing a joint petition with your spouse. So, if you’re planning to buy a car with cash, make sure you can exempt the full value.

Keep in mind that the bankruptcy court will look at whether the purchase was reasonable. If buying a car isn’t found to be a necessity, you could lose the vehicle.

Taking Out a Car Loan Before Filing for Bankruptcy

As long as the vehicle you’re buying isn’t expensive, taking out a car loan shortly before filing a Chapter 7 bankruptcy claim may not cause any issues. However, you will need to sign a reaffirmation agreement to remove the loan from your case and commit to continue making payments.

That said, if you wouldn’t have qualified for Chapter 7 bankruptcy without the motor vehicle ownership deduction on the means test, taking out a car loan before filing for bankruptcy can raise a red flag with the trustee. If you don’t have a good reason for making the purchase, you can expect a problem.

Financing a Car After Filing for Bankruptcy

Contrary to popular belief, qualifying for a car loan after receiving a Chapter 7 bankruptcy discharge is not all that difficult.

If you earn a good income, many dealers will agree to finance a vehicle purchase despite the bankruptcy. And some car dealerships won’t even look at your credit history. But with either option, you can expect a higher interest rate.

What if You’re Planning to File for Chapter 13 Bankruptcy?

When you file for Chapter 13 bankruptcy, you’ll submit a three- to five-year repayment plan to the court. If you finance a car purchase shortly before filing your claim, you may not be able to include the purchase in your debt reorganization.

However, paying out your loan according to its terms may be preferable to the alternative. To buy a car during your Chapter 13 bankruptcy case, you’ll need to obtain court approval and find a lender willing to work with Chapter 13 debtors.

An experienced bankruptcy attorney can help you decide if buying a car before or after filing for bankruptcy is in your best interests. If you live in northern Utah, turn to the Law Office of Davis & Jones, P.C., for expert advice.

Our legal team, led by attorneys Lee J. Davis and Tony G. Jones, has helped more than 20,000 Utah residents obtain debt relief – and we can help you, too. To schedule a free consultation to discuss your timing for buying a car and filing for bankruptcy, contact the Law Office of Davis & Jones in Salt Lake City, Utah, today.