NEW VEHICLE PURCHASES AND BANKRUPTCY: TIMING IS EVERYTHING
It is not unusual to require a new vehicle at around the same time you are considering filing for bankruptcy. Or to be driving a vehicle with a terrible interest-rate attached at that time. Or a vehicle securing a loan which also rolled in the payoff balance on a prior vehicle. Or a leased vehicle for which you are certain to be over the required mileage upon termination of the lease. Or a vehicle with an unusually high monthly payment for any other reason.
Should you buy a new car before filing the bankruptcy? Or wait until after filing?
The immediate answer is that this is a highly fact-specific question the answer to which will differ depending upon whether you are filing a Chapter 7 or a Chapter 13 bankruptcy, among other considerations.
It is something that you should discuss with an experienced bankruptcy attorney long before ever filing your case.
If you are attempting a “DIY” bankruptcy filing without an attorney and you are reading this post in an attempt to answer this question for yourself—don’t. Consult an attorney before initiating any action.
That said, below are some of the key considerations you will discuss with your bankruptcy attorney before making this decision.
CHAPTER 7 VS. CHAPTER 13?
This is the primary consideration, and this question frames the remaining considerations. Other than the question of whether the vehicle purchase is or isn’t in “good faith,” whether we are dealing with a Chapter 7 or a Chapter 13 bankruptcy swings the focus of the question of whether to purchase a vehicle prior to filing a bankruptcy toward the question of protection of the vehicle purchased itself vs. the question of the question of the acceptability of a Chapter 13 Plan of reorganization.
CHAPTER 7 ASSET PROTECTION QUESTIONS
In a Chapter 7 bankruptcy, there is the possibility of assets being liquidated (taken and seized) by an individual known as the Chapter 7 Trustee. If any of your property is worth more in fair-market value than the statutory protection available for that type of property (jewelry, household goods, home equity—and vehicle, among others), then the Trustee may seize it in order to sell it off and distribute the sale proceeds to your creditors.
In the majority of Chapter 7 cases, no property is liquidated at all because these protections, known as “exemptions,” are generally sufficient to protect all of what the average person tends to actually own.
When it comes to vehicles, the question is whether the vehicle has more equity than can be protected with the Federal or Michigan automobile exemption.
Thus, if you purchase a car with cash (generally completely non-exemptible), the question will be what the value is at the time of the bankruptcy filing and whether that value is more or less than the exemption amount for a vehicle. If it is more, you will have purchased a vehicle that is immediately available for liquidation by the Chapter 7 Trustee.
Further, the filing of the bankruptcy proceeding itself has certain effects.
In addition to stopping collections harassment, garnishments, lawsuits, and creditor activity of that sort, the filing of a Chapter 7 or Chapter 13 bankruptcy also prevents the “perfection” of security interests. That is, parties may no longer file liens against the Debtor’s properties.
This includes the recording of a vehicle lender’s security interest on your title with the Michigan Secretary of State, if you are financing the purchase of the vehicle.
If you finance the purchase of a car on Day 1, then file the bankruptcy on Day 2, the lien will not have been perfected—and, again, you have a vehicle on your hands with full equity that the Chapter 7 Trustee may then seize and liquidate.
CHAPTER 13 BANKRUPTCY PLAN CONFIRMATION ISSUES
“Confirmation” is the Bankruptcy Code’s jargon for “approval” of the Chapter 13 Plan of Reorganization (payment plan) that the Debtor submits to the Court for approval upon commencement of the Chapter 13 proceeding.
If your Chapter 13 Plan is not confirmed, the bankruptcy case is dismissed.
The Chapter 13 Trustee assigned to your case by the Bankruptcy Court upon filing has a great deal of latitude to object to the confirmation of the Plan if it fails to adhere to the criteria for a Plan that may be confirmed within the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure.
In addition to the good faith/bad faith criteria discussed below, the primary requirement is whether or not the debtor has proposed a Plan which proposes to apply all of his of her “projected disposable income” to the Chapter 13 Plan.
The Debtor’s personal household expenses—including car payments—are therefore scrutinized, and, in the Eastern District of Michigan, frequently the subject of Trustee objections.
A vehicle payment that is too high on a monthly installment basis will be objected to.
A vehicle that is a luxury brand, such as a Mercedes, Jaguar, Lexus, higher-end Audi, Porsche, or a McLaren 720S, even if a used, older model, will draw an objection.
IS THE PURCHASE GOING TO BE VIEWED AS MADE IN GOOD FAITH OR BAD FAITH?
If the vehicle purchase is going to be viewed as having been made in “bad faith” after the bankruptcy case is filed, it should be avoided.
The wrong car purchased for the wrong amount within the wrong time-period prior to the bankruptcy case’s filing will be viewed as bad faith.
Additionally, there is case-law out there determining that excessive “pre-bankruptcy planning,” that is, increasing the Debtor’s debt “in connection with” a bankruptcy filing, is bad faith. Financing a vehicle purchase prior to a bankruptcy filing could be construed as bad faith in this regard.
Likewise, paying for a vehicle in full with otherwise non-exempt cash or via the sale of other non-exempt assets can draw scrutiny of the wrong sort.
Financing a new vehicle solely for the purpose of increasing deductions from gross income on the “Means test” has also been found to constitute bad faith.
SO SHOULD A NEW VEHICLE EVER BE PURCHASED PRIOR TO A BANKRUPTCY FILING?
There are indeed legitimate and good faith circumstances in which a vehicle not only can be but should be purchased prior to a bankruptcy filing.
For example, if you are entering a five-year Chapter 13 bankruptcy proceeding and are driving a vehicle on its last legs, the pre-filing purchase a new vehicle should be discussed with your bankruptcy attorney. Not for the purpose of paying less to your creditors or jimmying your Means Test but for the ability to merely survive the Chapter 13 proceeding without incurring greater attorney fees, interest, and other costs that will themselves detract from the amount of your income to be distributed to your creditors through the Plan.
PURCHASING A CAR BEFORE BANKRUPTCY: THE BOTTOM LINE
The bottom line is that, whether or not you think you have a “good faith” reason for purchasing a vehicle prior to filing for bankruptcy, it should be discussed with your bankruptcy attorney before any action is taken.
“Bad faith” is one of just a few reasons why your bankruptcy discharge of debt might be denied, and it is not a risk worth taking without expert advice.
Contact The Law Offices of Walter Metzen & Associates now to schedule a no-cost, no-obligation initial consultation.