Buying a car before filing for bankruptcy might be a good idea. However, as with all financial decisions that you are confronted with before or during the bankruptcy process you should discuss this with your attorney before committing to a purchase.
Advantages of Car Purchase
While it is possible to purchase a new or used car after filing for bankruptcy the interest rate you will pay for a car loan will be much higher than if you purchased the car before filing.
When a consumer files a chapter 13 bankruptcy, a debt repayment program lasting 3 to 5 years will be implemented by the court. The party filing the bankruptcy has to pay these obligations, and most likely needs reliable transportation to get to and from work. If an automobile is six years old, it may become very expensive to maintain and could need replacement at some point during the payback period. Buying a car before bankruptcy filing will put your mind at ease concerning transportation.
Speak With Your Attorney
Your Chapter 13 bankruptcy attorney can offer you sound advice on addressing your need for a car. Imagine you have a car that is one year old, a luxury model, and you have a balance of $40,000 on the car.
Whether you keep the car or not actually depends on what your attorney believes at what rate you or percentage you will have to pay your debts off. For the moment, assuming you return the car to the finance company. The finance company will then sell the car. They manage to sell the car for $20,000, but you owe them $45,000. Your repayment plan calls for an 80 percent repayment of debt. This means that you now have a new liability of $15,000 to the finance company. Here is how it is calculated: $45,000 is owed on your note, when the finance company subtracts the $20,000 they received for the car from the $45,000 that you owe on the car the balance is $25,000, the balance is known as the deficiency payment. However, you are required to repay 80 percent of the deficiency payment and that equals $15000. This means you will have to repay to the trustee $250 per month for your car loan after you have gotten rid of the car. Even if you replace that car with a less expensive one your payments will likely be around where they were before.
However, if you are only repaying one or two cents on the dollar the picture is completely different. The remainder of your loan when calculated at two cents on the dollar is only a total amount of $300.
In addition, bankruptcy laws vary from state to state as to what property may be kept and under what circumstances. Moreover, everything that you do in a financial manner while filing for, or when you are in bankruptcy must be done in good faith. Good faith means that you do not act in a fraudulent manner. When you hire a bankruptcy attorney, you have not hired someone to just file your paperwork. An experienced bankruptcy attorney can give you excellent advice that will help strengthen your financial position while maintaining a good faith posture.