Under United States bankruptcy laws, if you have the cash to buy a car outright, then you can do so at any time. If you need to finance the car purchase while in an active Chapter 13 bankruptcy, then your ability to do so depends on how far along you are in the process.
In this article, we examine the considerations that go into financing a vehicle when you are seeking protection from creditors under Chapter 13 bankruptcy. If you want to speak with a bankruptcy attorney about purchasing a vehicle under Chapter 13 bankruptcy, call Stone Rose Law at (480) 498-8998 or contact us online.
How to Get Bankruptcy Court Approval to Buy a Vehicle Under Chapter 13
The key aspect of Chapter 13 bankruptcy is its debt repayment plan, under which you agree to pay certain amounts to your creditors for a definite time in return for bankruptcy protection and a discharge of some or most of your debts.
The bankruptcy court will confirm whether your repayment plan meets the minimum requirements under the bankruptcy code and is feasible-in other words you can afford the plan with your current budget. If it does, the plan will be approved by the Judge and the plan is a binding agreement between you and your creditors.. This is known as confirmation of the plan.
Your ability to finance a car purchase depends on whether you try to do it before or after the bankruptcy court confirms your repayment plan.
- The pre-confirmation period runs from the day you file your bankruptcy petition up to the day the bankruptcy judge approves the debt repayment plan.
- The post-confirmation period starts on the day the bankruptcy judge approves the repayment plan.
The Pre-Confirmation Period
When you file for bankruptcy under Chapter 13, all interested parties, including your creditors, receive notice. The repayment plan is initially drafted as a “proposed plan” based on the information you have or provided your attorney. Your creditors have a 90-day period (longer for government entities) after the case is filed to submit these proof of claims for review and confirmation. A proof of a claim is a formal form the creditor must submit with the information of the debt you owed at the time the case was filed. They must attach supporting documents of this debt. This must be filed if they wish to receive any distribution from the Chapter 13 Plan.
Creditors can file objections to the proposed plan as well. The formal deadline to file objections to confirmation of a plan is fourteen (14) days after the date set for the first meeting of creditors or twenty-eight (28) days after service of the plan, whichever is later. Objections can be resolved in the form of a stipulated order or an amended Chapter 13 plan. Your bankruptcy attorney will negotiate these objections and prepare either the stipulated order or the amended plan.
The final objection arrives from your Chapter 13 Trustee. The trustee will file a recommendation/objection to confirmation within twenty-eight (28) days after the last date set for credit or objections to the plan. This usually includes a list of items that must be resolved, such as pending objections, required language for the stipulated order, and requests for additional documents or information.
Once the trustee makes a plan recommendation/objection, a proposed stipulated order of confirmation must be submitted within thirty (30) days. The stipulated order is drawn up for signature by the debtor, the debtor’s attorney, any objecting creditors, and the trustee. Once everyone has signed the proposed order, it goes to the bankruptcy judge for approval. The Chapter 13 Plan is considered confirmed once the Judge approves the order.
Considerations for Obtaining a Car Loan During Pre-Confirmation of Your Plan
If you want to finance a car purchase before the court confirms the repayment plan, you must first satisfy some requirements. These include:
- You will need the trustee’s consent to file a motion to the court seeking the court’s approval to incur the new debt.
- This motion must provide the trustee with verification of your current income and certify that you are current on your repayment plan payments, that you are not in default under the plan’s terms, that the debt is for a reasonable amount, and that you can pay all future plan payments and your projected living and business expenses in addition to the new debt.
- The motion must also certify that the motor vehicle purchase is necessary for your maintenance or support or for that of a dependent of yours. If you are engaged in a business or are self-employed, then the motion must certify that the vehicle is needed to continue the operation of your business.
- You must then wait for the court to review and approve your motion. Once you receive approval, then you may proceed with the purchase.
Finding an Appropriate Vehicle and Lender
When looking for a vehicle to finance, remember that it should be a reasonable purchase for an essential purpose. This means that it should be reliable transportation that you can afford. The bankruptcy court will review the kind of car you propose to buy. If it concludes that your chosen vehicle costs more than you can afford or is impractical for basic transportation like going to and from work, it may refuse your motion.
Choose the Right Kind of Seller
Not all car sellers accept customers with bad credit or going through bankruptcy. When you are shopping around for a replacement vehicle, look for the right lender willing to work with bankruptcy filers.
For example, ask whether the seller finances new or used vehicle sales to Chapter 13 customers. Generally, these lenders are often willing to offer you more flexible loan terms, like longer repayment periods or lower monthly payments, usually in return for a higher interest rate.
Gather Information About the Vehicle and the Proposed Financing
If you find a vehicle you might like to buy, do not enter into any purchase agreement on the spot, even if the seller encourages or pressures you. You do not yet have the bankruptcy court’s approval to enter such an agreement.
Instead, gather the following information about the vehicle from the prospective lender:
- The year, make, and model of the vehicle.
- The total amount of the purchase price, any down payment, and the interest rate on the balance.
- The monthly payment on the amount financed.
- A copy of the proposed sales agreement.
In the proposed sales agreement, including the maximum interest rate and the words “or similar” in the vehicle description can be helpful. If the court approves your motion but the final sales agreement has a higher interest rate than the proposed agreement or the vehicle you eventually buy is not the exact same model you looked at originally, this could cause trouble getting the court’s approval of the final agreement.
Also, be sure you can afford the proposed monthly car payment and any required car insurance you must maintain under Arizona law.
Wait for the Court’s Approval of Your Motion
The bankruptcy court judge will need time to review your motion and decide whether to approve it. This review is where the court will determine whether your choice of vehicle is reasonable and whether your auto loan financing obligation will not interfere with your ongoing ability to keep up with your repayment plan.
In some cases, especially if your attorney cannot secure the trustee’s cooperation in getting a stipulated order approving the motion, the trustee may propose modifications to the terms of your car loan, Chapter 13 repayment plan, or both.
If the court denies your motion, this does not mean that the court will not allow you to buy a car. In this instance, it is more likely that the court has concluded that your choice of vehicle is impractical or that the sales agreement terms are incompatible with your ability to remain in compliance with your repayment plan.
If this happens, you can use the court’s rejection of your motion as guidance when you return to step one and start shopping for a different replacement vehicle.
If the bankruptcy court approves your motion, it will issue an order. The order will state that the court authorizes you to buy a car the same or similar to the one you proposed in the motion, a maximum purchase price, maximum rate of interest, and maximum purchase amount.
In this case, you can now go to the seller and buy the car in question, or one similar to it, under the terms and conditions of the approved sales agreement.
How Long Do These Steps Take to Complete?
Shopping for a car, filing a motion, and getting the court’s approval usually takes around 30 days.
If you need that approval faster, your attorney can make your motion for an expedited hearing. You will need to have a valid reason to receive approval for an expedited hearing, like needing the car to commute to work to enable you to keep up with your repayment plan or else you may lose your employment.
Post-Confirmation Purchase of a Vehicle Under Chapter 13
If the bankruptcy court has already approved (confirmed) your repayment plan and you want to obtain a car loan, then the process is a little different from the pre-confirmation one above. The main difference is that rather than requiring the approval of the bankruptcy court, you only need to obtain the trustee’s approval.
To obtain this approval, the Trustees require a request letter with the following information and support documents:
- Confirmation that you are current on your payments under the repayment plan.
- Copies of two recent pay stubs to confirm your income
- A draft of an amended budget showing that you can afford the car.
- A copy of the proposed purchase agreement, including the total sale price, the rate of interest on the car loan, the amount of the down payment, and the monthly payment amount.
- Explanation of how you will come up with the money to make the down payment.
- Confirmation that the new car purchase amount must not affect your ability to pay the minimum amounts you owe under the plan.
- Justification for lowering your monthly payment and a draft of the modified Chapter 13 plan if the new budget requires it.
Based on this information, if the trustee approves the post-confirmation purchase, the trustee will issue a letter to the dealership to close the sale.
If the trustee does not approve the purchase, then you may file a motion with the bankruptcy court, serve it on the trustee and your creditors, and request a hearing before the court.
What Other Considerations Should I Keep in Mind About Buying a Car While in Chapter 13?
Buying a car during Chapter 13 bankruptcy requires careful planning and court approval. If you follow the steps above, you can successfully finance a car purchase and start rebuilding your credit simultaneously. Always reach out to the attorney before you begin shopping for perimeters. At Stone Rose Law, we have a list of recommended dealerships that work specifically with individuals in active bankruptcy.
Keeping your new loan manageable will not only improve your chances of having the bankruptcy judge approve your motion, but it can also make it more likely that the loan payments will not overstretch your means to stay compliant with your repayment plan.
Before deciding to buy a car while subject to a repayment plan, consider carefully whether you really need one. Adding a car loan on top of the repayment plan obligations carries some risks, and you might start missing payments. You may end up not only without the car but also falling behind on your repayment plan. This new purchase is considered a new debt and fully collectible if you default.
If you can find alternate transportation, like public transportation, carpooling, ridesharing, or even borrowing a car from family members or a friend, you may be able to delay buying a car until after you are out of your Chapter 13 repayment plan period. Buying an inexpensive car using cash may limit your purchase options, but it may be a better choice than financing.
Also, if you choose to buy a car, keep your choice as economical as you can and your payment period as short as possible. Instead of a new car loan, consider a used car. Make your down payment as big as possible to help accomplish this.
If someone agrees to cosign with you on your loan or you can obtain a secured loan, these may help you negotiate more favorable terms with the auto lender. Explore whether you can get a car loan through a bank or credit union instead of going through a car dealership; they may offer a lower interest rate.
Always keep making payments on time. A positive payment history not only keeps you out of trouble with the lender and the court, but it can also help rebuild good credit and boost your credit report.
Serving Arizona Residents Bankruptcy Support
The bankruptcy attorneys at Stone Rose Law are here to help you with all your bankruptcy filing needs and to help you buy a new or used car after filing bankruptcy under Chapter 13.
Having an experienced bankruptcy attorney help you navigate your bankruptcy case can significantly improve your ability to obtain a bankruptcy discharge of many of your debts, repay creditors under Chapter 13 bankruptcy, and restore your credit.
To schedule a free consultation with a quality Arizona bankruptcy lawyer, call (480) 498-8998 or contact us online.
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