Buying a Car before Filing Bankruptcy

Fresh StartAs a bankruptcy lawyer, I am not allowed to advise clients to purchase a vehicle in order to reduce their plan payment in a Chapter 13 case or to qualify for a Chapter 7 bankruptcy case.  But there are a couple of good reasons to buy a vehicle before filing bankruptcy.  I often meet with clients that are driving ten year old vehicles because they can’t afford to replace them.  They spend a huge amount of money each year in maintenance of this vehicle, rather than purchasing a newer vehicle that would be more reliable and less costly.  Also consider the missed days of work resulting from having to take the car to the shop.  When all of these costs are considered, keeping the old vehicle may not be that much less than buying an inexpensive new or slightly used vehicle.

In Chapter 13 bankruptcy, payments to unsecured creditors are based upon disposable income.  Disposable income is calculated by averaging the last six months income and then subtracting standard IRS deductions from the income.  These deductions include taxes, insurance premiums, housing expenses, etc.  They also include a deduction for an ownership or lease expense associated with a vehicle.  However, there is not a deduction for driving an old, worn down, expensive to maintain vehicle.

If you are considering filing Chapter 13 bankruptcy then it may be a good time to purchase (and finance) a new vehicle.  Doing so will get you the deduction for having an ownership expense associated with a vehicle which may reduce your disposable income, and as a result the amount paid to the unsecured creditors.  More importantly though, it will give you a vehicle that isn’t costing you’re a large amount to maintain each month and doesn’t regularly break down so that you don’t miss work taking the vehicle to the shop.  Chapter 13 bankruptcy is about taking control of your life and finances, and sometimes that starts with purchasing a new car.  Before going out and purchasing a vehicle, speak with a qualified bankruptcy attorney, to discuss your particular financial situation.