The average automobile only lasts about eight years. Therefore, most people need to buy a car immediately before, during, or shortly after bankruptcy. All three of these things are possible, as outlined below.
It is a fact of life that people with poor credit have fewer options in this area. Selection is limited. Financing is more difficult to obtain, and more expensive as well. However, if you are willing to accept these conditions, buying a car is usually not a problem, bankruptcy or not.
Bankruptcy, especially Chapter 13 bankruptcy, usually improves your car-buying prospects. The monthly debt consolidation payment forces families to run tighter ships financially. The additional fiscal discipline helps them show lenders that they have turned over a new leaf. Outside bankruptcy, these borrowers are just people with bad credit.
Buying a Vehicle Before Bankruptcy
Generally, motor vehicles are exempt property in Pennsylvania. Some unscrupulous filers transfer non-exempt property, like cash, into exempt property, like a car, right before they file bankruptcy. Other miscreants purchase luxury items, such as fancy cars, and then claim they cannot pay their bills.
These instances are quite rare. But they happen frequently enough that the trustee (person who oversees the bankruptcy for the judge) often scrutinizes pre-petition vehicle purchases.
Transactions in the 90 days preceding a bankruptcy filing are presumably fraudulent. So, in these situations, the debtor basically has the burden of proof to show that the transaction was honest. Evidence on this point includes the condition of the debtor’s vehicle at the time of purchase and the terms of the purchase (e.g. was it an arms length, market value transaction).
The trustee could claim that an older transaction was fraudulent. But since the presumption does not apply, these claims are almost impossible to prove in court.
Bankruptcy fraud is a very serious matter. Even if there was no malice, most debtors face long prison sentences if they are convicted.
Purchasing a Vehicle During Bankruptcy
Chapter 13 is a good way to improve your car-buying ability. But since it lasts up to five years, many of these debtors need to buy a vehicle during bankruptcy. There is a process involved here.
First, debtors must select a vehicle and secure financing. Once again, the terms must be above board. So, the interest rate, down payment, and monthly payment will probably all be higher than normal.
Therefore, debtors must also show that they can handle these payments without affecting their ability to make the required monthly Chapter 13 payments. Normally, this means that the debtor must have an additional income stream.
At this point, unsecured creditors often object to motions to incur additional debt. They often argue that, if the debtor has more money, the debtor should increase the monthly debt consolidation payment. The trustee sometimes objects as well. If a debtor suddenly has more money, the trustee might smell fraud.
Independently, the debtor must show that the purchase is reasonable and necessary. If the evidence on this point is compelling, judges often disregard creditor and trustee objections.
Buying a Vehicle After Bankruptcy
Raising one’s credit score is usually the key to buying a vehicle after bankruptcy. Even after the filing falls off your credit record, your credit score does not automatically improve.
Opinions vary, but most people agree that a good payment history is the best way to raise a credit score. Some creditors report on-time payments to credit bureaus. Most creditors quickly refer delinquent accounts to collections agencies. These referrals often torpedo your credit score.
Effective credit management is another good way to raise your score after bankruptcy. Obtain a credit card, charge something every month, and pay off the balance every month. After a few months, your credit score could go up by 100 points or more.
Building a financial reserve is important as well. Most people file bankruptcy because of high medical bills, divorce, job loss, or another situation which is mostly or entirely beyond their control. Even a few hundred dollars in savings helps people make it through these storms. Additional savings could essentially weatherproof your family. Sacrificing in some areas makes it easier to buy a car and the other things you truly need.
A bankruptcy filing does not affect your ability to buy a car. For a free consultation with an experienced bankruptcy lawyer in Philadelphia, contact Bankruptcy Done Right. The sooner you reach out to us, the sooner we start working for you.