Monday, February 21, 2011

Need to Get A New Car? You Might Want To Do It Before Filing For Bankruptcy

A question clients frequently ask me involves the timing of buying a vehicle when filing for bankruptcy. The question of whether it's better to buy a vehicle before filing for bankruptcy or after filing is a good one.

If you're filing a Chapter 7 bankruptcy, there can be a few advantage to buying before you file. First, you may have a lower interest rate. After filing, you'll be able to get a car loan easily, but the interest rate is likely to be around 25%. Sometimes clients will actually have decent credit scores before filing that may allow them to get lower interest rates. Even a few percentage points can make a big difference over the life of the loan.

Second, many clients of mine find themselves in the unfortunate position of having to buy a vehicle at a "buy here, pay here" lot. These dealerships specialize in catering to low-income or bad-credit customers. As such, many of the cars are low quality and unreliable. The prices are inflated and the interest rates are exorbitant. If you buy the vehicle before filing your case, it is a pre-petition debt and is dischargeable. Of course, if you want to keep the vehicle you'll most likely have to sign a Reaffirmation Agreement that still makes you liable on the loan, but it gives you some time to evaluate the vehicle before being stuck with it. This is because you can rescind the Reaffirmation Agreement until you receive your discharge. If you do, you can return the vehicle without being responsible on the loan anymore. Because the average Chapter 7 case lasts about four months from filing to discharge, you can keep it and use the pendency of your case more or less as an "evaluation period". If you purchase the vehicle after your case is filed, it is a post-petition date. If something happens to it or it's repossessed, your out of luck and you're still liable on the car loan.

On the down side, if you purchase a vehicle before your case is filed and you have too much equity in the vehicle, your case trustee may seek to seize the vehicle and sell it. Also, if someone is going to be giving you a vehicle outright, it may be best not to title the vehicle in your name until after your case is filed, depending on the value of the vehicle and your available bankruptcy exemptions. The Ohio bankruptcy exemption for equity in a vehicle is currently $3,450.

Within the context of a Chapter 13 bankruptcy, there are also advantage to purchasing a vehicle before your case is filed. Because it is a pre-petition debt, you can include it in your Chapter 13 bankruptcy at (most likely) a reduced interest rate, currently 5.25%. If you choose to purchase a vehicle after the filing of your case, you'll need to first talk to your attorney. This is because you need to get court permission to incur any significant debt after your Chapter 13 is filed. This usually involves filing a motion with the bankruptcy court. The court can also require you to get multiple competing bids and may deny your motion if it is not satisfied with the vehicle you are trying to obtain. It can be a time-consuming and burdensome (although sometimes unavoidable) process.

The pitfalls with getting a vehicle before your Chapter 13 are similar to those involved in a Chapter 7. Although your Chapter 13 trustee won't take the vehicle, the excess equity in the vehicle may mean that you end up paying more through your Chapter 13 plan to your creditors. As always, it's best to discuss these issues with a qualified bankruptcy attorney before filing your case.

I'm an experienced Canton bankruptcy attorney who's filed or managed over 1,000 cases. For more information on Chapter 7 and Chapter 13, call me at 330-605-3508 or visit my website at http://www.ohiobankruptcyrelief.com/.

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