Really? You Can Buy a Car Before Filing Bankruptcy?
Can I Buy a Car before Filing Bankruptcy: Maybe.
In considering whether or not to buy a car before filing for bankruptcy, either Chapter 7 or Chapter 13, there are multiple issues involved. Any such decision should only be made with the counsel of an experienced Michigan bankruptcy attorney.
Should I Buy a Car before Filing Bankruptcy: Asset vs. Debt Issues
A new car purchased prior to filing for bankruptcy represents two separate concepts in bankruptcy law related to the vehicle as an asset of the “bankruptcy estate” subject to potential liquidation in a Chapter 7 bankruptcy and, if the purchase of the vehicle is financed by a loan, a debt that must be accounted for one way or another in the bankruptcy depending upon whether you are filing a Chapter 7 or Chapter 13.
As an asset, a car, like all of your personal property and real estate, is an item that you own with a certain fair-market value that becomes part of the legal “bankruptcy estate” that is automatically created by function of law upon the filing of a Chapter 7 or Chapter 13 bankruptcy in Michigan. All of your assets must be disclosed and valued in your petition schedules.
In a Chapter 7 bankruptcy, if the value of your assets outweighs the value of the “exemptions” that your bankruptcy lawyer will apply to your assets in your bankruptcy petition to exempt (remove them) from the bankruptcy estate, an individual assigned to your case after filing known as the Chapter 7 Trustee will have the ability to seize the assets and sell them off for the benefit of your creditors, who, otherwise, will receive nothing from you for the debts that you owe them.
The value of an automobile in Chapter 7 bankruptcy depends upon its age, make, model, mileage and general condition, offset by the value of any lien on the title as filed with the Michigan Secretary of State’s office from a lender of a loan financing the purchase of the vehicle (or other personal loan for which the vehicle has been pledged as collateral security).
Thus, if, prior to filing a Chapter 7 bankruptcy, you purchase a car that is worth, in Blue Book value terms, $5,000 but there is a lien on the vehicle for a loan balance of $6,000, it has no equity value that must be exempted or protected in a Chapter 7 bankruptcy to prevent it from being liquidated (seized and sold off) by the Chapter 7 Trustee. The car will be safe in a Chapter 7 bankruptcy.
If the same car is owned in full, with no lien on the title off-setting its straight-up Blue Book value, the car may or may not be safe from liquidation depending upon the rest of your property owned and the ability of your bankruptcy lawyer to cover the value of the vehicle with the lower-than-$5,000 automobile exemption and other exemptions.
If the car has been purchased in the few months prior to the filing of the bankruptcy, the question will be, if the purchase was financed, whether the loan lender has bothered to “perfect” the lien on the vehicle’s title with the Michigan Secretary of State. The filing of the bankruptcy, via the “automatic stay” effect of the filing, stops all activities by creditors which can be classified as the collection of debts, including the perfection (filing and recording) of liens on vehicles, homes, or other property.
If the loan lender did not manage to perfect its lien prior to filing, then what you have is not a $5,000 car with a $6,000 lien against its equity value that is safe from liquidation but a $5,000 car owned in full with a $6,000 unsecured debt owed to the loan lender that will be just as dischargeable as other unsecured debts such as credit cards or medical debts. Depending on the value of your other property, that car may or may not now be exemptible and safe from liquidation.
It is thus important to ascertain prior to filing a Chapter 7 bankruptcy that a recently purchased vehicle has had its lien perfected.
In a Chapter 13 bankruptcy, there is no liquidation of assets at all as Chapter 13 is a “payment plan” bankruptcy in which you repay some of what you owe to your creditors via a 3-5 payment-plan overseen by the Federal Bankruptcy Court. Non-exempt assets can, however, affect the required amount of your monthly Chapter 13 payment plan installment payments. Debts are paid in priority order in Chapter 13s according to whether they are secured or unsecured debts. Thus, this remains an important analysis to undertake prior to filing a Chapter 13 bankruptcy as well.
As a debt issue, the purchase of a car prior to filing a bankruptcy generally does not present any issue with regard to allegations of fraud from creditors. Presumably, if you are buy a car before filing bankruptcy, you are doing so because you need a vehicle and therefore would do so with the intention of retaining the car and continuing to make payments on any loan financing the purchase of the vehicle. (If, for any odd reason, that is not your intention, this is certainly something you should discuss with a bankruptcy lawyer prior to any pre-bankruptcy purchase!)
In a Chapter 7 bankruptcy, you may be asked by the lending creditor to considering signing a document called a reaffirmation agreement. A reaffirmation agreement is a separate agreement that may be signed in a Chapter 7 bankruptcy which, if signed by you, potentially by your bankruptcy attorney, and by the lending creditor, filed with the bankruptcy court by the creditor, and approved by the judge in your Chapter 7 case, will put you back on the hook for liability of making that vehicle loan as if you had never filed for bankruptcy at all. All of your dischargeable debts will be discharged by the Chapter 7 bankruptcy—except for that vehicle loan.
A reaffirmation agreement and the reaffirmation process is one of the more pointlessly complicated features of Chapter 7 bankruptcy since the enactment of the 2005 BAPCPA “bankruptcy reform act” by Congress. Your bankruptcy attorney will discuss with you the adviseability or lack thereof of signing and returning any such reaffirmation agreement to a providing creditor, depending on the particular terms of a particular agreement and the particular policies of particular lenders.
But it is almost certain that you will be offered a reaffirmation agreement if you purchase a vehicle shortly before the filing of a Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, you have, as in a Chapter 7 bankruptcy, the option to retain or surrender property that is collateral security for secured debts. The Chapter 13 payment plan that your bankruptcy lawyer drafts with you will account for the repayment of the car loan either directly from you to the lender or to the lender through the Chapter 13 plan and the Chapter 13 Trustee (whose job is to distribute your monthly payment funds to your creditors) depending on the particularities of your individual plan and circumstances. The loan will be treated, either way, as a high priority secured debt, to be repaid in full.
Thus, no allegation of fraud or impropriety should result from pre-Chapter 13 vehicle purchase.
Further, because a Chapter 13 banrkuptcy runs 3-5 years long and, in the Eastern District of Michigan, prevents you from incurring debt more than $2000 (as of this writing) without prior court approval, it may be advisable to secure new, reliable transportation before filing so that you can: A) assure yourself of having reliable transportation for the duration of your Chapter 13 (a necessity in the Detroit area); B) obtain the vehicle without having to incur new attorney fees and endure a prolonged timeframe for the car’s purchase because of the period of time the court will require you to give your creditors to object to the incurring of the new car loan debt after filing; and C) take advange of the lower interest rates you may enjoy prior to filing a bankruptcy than may be offered post-filing.
What If I Buy a Car before Filing Bankruptcy: the Means Test
There are also advantages with regard to the “means test” standard for Chapter 7 bankruptcy eligibility (and which may impact the necessary amount of your monthly plan payments in a Chapter 13 also) if you are making payments going forward from the bankruptcy filing for a secured car loan if you are retaining and not surrendering the vehicle.
The US Supreme Court has addressed the question of whether your bankruptcy attorney may advise you to buy a car before filing bankruptcy. The Court approved “pre-bankruptcy planning” of this sort with some reservations related to general good faith purposes in obtaining the car and in filing the bankruptcy. Generally, your bankruptcy lawyer may (or may not) so advise you if you were thinking of buying a new car anyway, need a new car, and are not simply buying the car to obtain better results on the means test.
Whether or not The Hilla Law Firm PLLC or any other Michigan bankruptcy attorney would so advise you is highly dependent upon your particular circumstances.
The Supreme Court has also stepped in to discuss particular expense deductions available in the means test related to car ownership. A recent decision, In Re Ransom, essentially held that, for purposes of calculating the means test in a bankruptcy petition, a filing consumer may only deduct what is called an “ownership expense” for an automobile from their means test average income if the automobile has a loan or lease on it—if they are making a payment on it, in other words.
Thus, strangely, you are actually rewarded under this Supreme Court decision to an extent for owing more money via a car loan for your vehicle by way of an improved means test deduction and improved odds of Chapter 7 eligiblity than you would receive if you paid your vehicle off and filed bankruptcy with a vehicle owned in full.
Such questions, as stated, are highly particularized to your individual circumstances. An experienced bankruptcy attorney should always be consulted if you think you may need to file for bankruptcy before entering into further debt or obtaining or selling off or transferring any assets.
If you need relief from debt and are a Michigan resident, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.