Buying a Car Right Before Filing Bankruptcyby Bryan M. Cowley on 03/23/13
Purchasing a car before bankruptcy can have some benefits. For example, having a car loan could help in rebuilding your credit after the bankruptcy. Also, depending on the state of your credit, the interest rate you qualify for before bankruptcy will likely be lower than after bankruptcy. You can expect that in general it will take three years after a bankruptcy to get a good interest rate on a vehicle loan from many lenders. Purchasing a car may also be necessary to ensure reliable transportation for work and family.
The U.S. Supreme Court in their recent decision, Ransom v. FIA Card Services, have provided another reason to buy a car before bankruptcy. When you file a Chapter 13 case you must pay your creditors your disposable income over a three to five year period. In calculating your disposable income you get to deduct certain expenses. One of those deductions is for a vehicle loan. The Ransom case says that you only get that deduction if you actually have a car loan. Previous to Ransom some courts said you could take the deduction regardless of whether you had a car loan or not.
However, you should also consider potential pitfalls that can arise when purchasing a car close to the time of filing bankruptcy. When you get a car loan you grant a security interest in the vehicle to the lender. The granting of a security interest can qualify as a preferential transfer under section 547 of the bankruptcy code. If it does the trustee can avoid the lien on the vehicle and potentially sell the vehicle to pay your unsecured creditors. Whether the granting of a security interest becomes a preference depends in part on the timing of the lender perfecting its security interest. The issue becomes more troublesome when someone borrows money from a family member to buy the car. A person in this circumstance considering bankruptcy should see an attorney before filing bankruptcy. Otherwise, you risk losing the car in the bankruptcy.
This might go without saying, but you can't buy a car knowing you are planning to file bankruptcy with the intent that the debt will just be eliminated in the bankruptcy. A creditor could object to discharge of such a debt under section 523(a)(2). An objection could also be made if you misrepresent your financial condition in the loan paperwork. This could be pretty obvious when comparing the loan application to the bankruptcy schedules filed with the court showing your financial condition. Such conduct could also give rise to a motion to dismiss the bankruptcy case entirely for bad faith.
Salt Lake bankruptcy attorney Bryan M. Cowley can help make sure your bankruptcy case is done right. Fill out our form or call 801.899.9529 or 435.277.0529 to schedule your free initial consultation. We help people all over Utah get a fresh start through bankruptcy. Consultations are available in office or by phone.