Can I Buy A Car During Bankruptcy?

Most cars and trucks remain driveable for about 150,000 miles. Long before they reach the end of their lifespans, most trucks and cars begin having significant mechanical problems which affect their reliability. So, if you drive a used car when you file bankruptcy, and most people do, you will probably need a new car before the bankruptcy ends, especially if you file Chapter 13. These bankruptcies normally last five years.

Since these debtors are still subject to court supervision, a Chicago bankruptcy lawyer must make appropriate arrangements with the judge in these situations. Thorough preparation is usually the key to success in these situations. However, even then, there’s no guarantee that a judge will allow the purchase, especially since creditors often object to these requests.

The Motor Vehicle Exemption in Illinois

Many people are concerned about Illinois’ $2,400 motor vehicle exemption. Even a modestly-priced used car most likely costs significantly more than that.

However, this exemption figure refers to the amount of equity in the property, not its fair market value.

Most vehicle loans are amortized. Banks pay themselves first by applying almost all payment money to advance interest. Therefore, most people have almost no equity in their vehicles until they pay off about half the loan. At that point, the vehicle’s fair market value is usually under $2,400, even if the owner owes substantially more than that.

This point gives rise to the redemption option. This alternative is often available in a Chapter 13. Assume Larry owes $5,000 on a vehicle that’s only worth $2,500. In some cases, if Larry pays the bank $2,500, the bank might have to tear up the remainder of the loan.

Motion to Incur Additional Debt

The rules for buying a car, house, or other large property item during bankruptcy are rather complex. However, it’s important not to try and circumvent these rules by paying cash for such property. If that happens, the trustee (person who oversees the bankruptcy for the judge) normally wants to know where the extra cash came from. Bankruptcy fraud allegations could follow that inquiry.

Car shopping is the first step in this process. The judge will want to know all the terms of the sale, especially the proposed monthly payment. Furthermore, the judge will only approve the sale if the terms are reasonable and the purchase is also reasonable.

On a related note, the trustee will probably want to know where the down payment, if any, came from, and how the debtor will make the car payments without compromising the ability to make the monthly debt consolidation payments in a Chapter 13.

Most car salesmen prepare dummy sales agreements to show the judge. Satisfying the trustee is very important as well. If the trustee approves the purchase, most judges will do likewise, often without holding a hearing.

Creditors, especially unsecured creditors, often object to in-bankruptcy vehicle purchases. They argue that the debtor should spend the extra money on debt retirement, as opposed to a new car. However, as long as the debtor needs a new vehicle, as opposed to wants a new vehicle, most judges overrule these objections.

Contact Dedicated Cook County Lawyers

Most bankruptcy debtors are able to buy the items they need, including a replacement vehicle. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. We routinely handle matters in Illinois and Indiana.

Resource:

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