Individuals and families who file Chapter 7 bankruptcies have often been forced to sell their cars to repay their debts, or had the vehicles repossessed for non-payment on their car loan. That can make getting to work challenging, especially in Metro Detroit where public transportation is limited. If you need to drive to keep your job, you may be debating buying a car before Chapter 7 discharge. If you do, here are some things to consider.
If you are anticipating needing bankruptcy, you may consider making big purchases -- like buying a car -- before you file your bankruptcy petition, so that the balance will be included in your Chapter 7 discharge. If you are worried about losing the vehicle to bankruptcy, you might even ask a family member to buy it for you, promising to pay them back for buying the car after the bankruptcy is over.
However, you should be careful about making a large, luxurious purchase immediately before filing for bankruptcy. If the Bankruptcy Court believes you made the purchase fraudulently, or gave preference to one creditor over another, it can “claw back” the money from purchases made 90 days (for standard creditors) or 1 year (to insiders like family members or business partners) before the bankruptcy is filed. Replacing the family SUV won’t generally be considered unreasonable, but a sports car with a high monthly payment might.
Most Chapter 7 bankruptcy cases take approximately 3 months from filing to discharge. However, depending on your financial situation, your bankruptcy attorney may recommend that you do some preparation before filing; for example, minimizing your debt or waiting out the clawback period explained above. A Chapter 7 discharge can also be delayed if there are problems selling non-exempt property, or if your schedule keeps you from completing the mandatory personal financial management court. A combination of these factors could leave some bankruptcy petitioners waiting the better part of a year for a Chapter 7 bankruptcy.
Sometimes, your circumstances will not allow you to wait for the Trustee to liquidate your non-exempt assets and the court to enter a discharge. The good news is that you may still be able to purchase a vehicle while your Chapter 7 bankruptcy is pending. Bankruptcy petitioners who are employed can often get financing for a car loan after the Section 341 creditor hearing is over, but before their other debts have been discharged.
Remember that collections on all your debts are put on hold while the bankruptcy proceedings are pending. That means your bank won’t be able to collect on the debt until the discharge has been finalized. While most financiers will want to see the discharge paperwork, some will be willing to lend money even before the bankruptcy is over.
There is no official waiting period for entering into new debt after a bankruptcy has been finalized. If you wanted to, you could buy a car immediately after your Chapter 7 bankruptcy is discharged. In most cases, what stands between you and a new or used vehicle is the lender. You will need to find a bank, credit union, or other auto lender that is willing to approve your credit even with the bankruptcy on your record. Because a recent bankruptcy affects your credit score, you will likely pay more in interest and receive other less favorable terms than you would if you waited to rebuild your credit.
One of the benefits of filing a bankruptcy is that it gives you an opportunity to rebuild your credit. Yes, the bankruptcy itself will lower your credit score. However, it also reduces your debt-to-income ratio and distances you from a history of missing payments, interest, and penalties. Because you no longer need to pay off large credit card or medical bill balances, you can use the months after your Chapter 7 bankruptcy discharge to demonstrate a consistent payment history and rebuild your credit. This will allow you to borrow money and buy a car more easily after your bankruptcy is over.
At John A. Steinberger & Associates, P.C., we understand how hard it can be to get around without a car while you wait for your bankruptcy to be complete. We can help you decide whether to buy a car before, during, or after your bankruptcy discharge, and will help petition the court to approve your purchase if you simply cannot wait. We are a full-service bankruptcy law firm in Southeast MI. We serve debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.