Buying a car before bankruptcy – A prudent decision?

Buying a car before bankruptcy – A prudent decision?
Buying a car before bankruptcy – A prudent decision?
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Oops! This is a tricky question. Should you buy a car or file bankruptcy to pay off your debts first?

Honestly speaking it is not a prudent decision to buy a car or a truck before filing bankruptcy. You should not incur fresh debts when you’re already swimming in a pool of debts. If you need to buy a new truck since your old one is not functioning properly, then it’s best to fix the parts that are problematic. For instance, you can just buy truck wheels and rims instead of buying a brand new truck.

Deciding factors

Here are a few factors depending upon which you need to decide if you should buy a car before discharging your debts:

  • If your vehicle is in a good shape
  • If your credit score is not bad
  • If you have to take out an auto loan
  • If you have to file Chapter 7 or 13 bankruptcy

When it is best to buy a car before filing bankruptcy

A bankruptcy trustee will be appointed when you decide to file Chapter 7 bankruptcy, better known as straight bankruptcy. The trustee will analyze your financial situation and check if there is any property that should be sold to discharge your debts.

Every state has a set of bankruptcy exemptions. These exemptions let you retain a certain amount of property. Several states would allow you to save a specific amount of equity in cars with a special exemption called motor vehicle exemption.

It is difficult to save the amount you have in your bank account. So, if you can’t save the money you have in the bank account but there is a chance to exempt the value of the new car, then the wise option would be to buy the car promptly.

When you shouldn’t buy a car before bankruptcy

It isn’t a wise decision to buy a car before filing bankruptcy under the following scenarios:

The motor vehicle exemption is not sufficient enough to save the car in bankruptcy

If you have lots of cash in your bank account. You use it to buy a car just to avoid paying back creditors.

Usually, the US trustee will check the following things:

  • The numbers of cars you possess
  • The cost of the new car
  • The make and model of the car

Remember, the bankruptcy trustee will ask several questions when you take out an auto loan to buy a car before submitting the petition. The auto loan makes it easier for you to qualify for straight bankruptcy since you can easily deduct car ownership expenditure on the means test.

If the sole purpose of taking out an auto loan was to qualify for car ownership deduction, then you’re in trouble. The trustee will throw different types of questions to know why you took out the loan for purchasing the car. If you can’t give a valid reason, then the trustee will regarding this as a bankruptcy abuse. Your bankruptcy case can be dismissed in that scenario. So beware!

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