December 5, 2016

How to Qualify for a Car Loan While in Chapter 13

car loan for chapter 13 debtorsDoes Chapter 13 law allow a debtor to purchase a new vehicle while in Chapter 13 and to finance this car or truck purchase?

This was the issue I faced recently while representing a client whose car was totaled in an accident. My client was in the middle of his Chapter 13 case, having paid into his plan for three years, with two years left to go.

Now, with no car to drive to work, my client was spending $20 per day on a rental car and needed to purchase a replacement. Here’s how we dealt with this problem.

First, my client had to find a replacement vehicle and a lender who would agree to finance a loan despite my client’s status as debtor in an active Chapter 13. Believe it or not, this task was not a problem – my client found a two year old vehicle in the $25,000 range and his dealership was able to arrange financing.

My client did have funds for a down payment – insurance had issued a property damage payment of around $7,000 which he wanted to use as a down payment.

Not surprising the terms of the finance contract were not great – it provided for a 72 month payoff and a monthly payment of $325 per month.

Motion to Incur New Debt

Before my client could sign anything, however, we needed to get permission from the judge since the bankruptcy law requires Chapter 13 debtors to file a Motion to Incur Debt prior to entering any loan contract. The finance company also required a signed order from the judge authorizing the deal.

I prepared and filed this Motion to Incur Debt, setting out all the details of the proposed deal. Motions like this in Bankruptcy Court need to be served (mailed to) all creditors and the trustee. In this case, the hearing on our motion was scheduled for almost a month later.

This month delay in gaining approval for the “outside loan” was a problem because used car dealers are not going to remove a vehicle from inventory on the hope and expectation that a judge will bless the deal and that the buyer will remain interested.

Motion for Expedited Hearing

So, my next step was to file a Motion for Expedited hearing. This would allow us to get before the judge in less than a week. I spoke with the judge’s calendar clerk and she advised me to “serve” all parties using email and/or fax, which I did.

Three days later my client and I appeared before the judge to present our motion. The trustee had no objections to the deal but the judge had questions about the type of car my client wanted to purchase. My client had negotiated a deal for a used Mercedes SUV in the $25,000 range. The judge noted that she considered vehicles made by Mercedes or BMW to be “luxury” vehicle and thus not appropriate for a Chapter 13 debtor. The judge agreed to authorize a finance deal but only for a non-luxury vehicle.

The judge’s order, which I drafted, provided that the debtor is “directed to enter into a purchase contract for a non-luxury vehicle.” The signed order appeared on the clerk of court’s website a day later and my client had what he needed to shop for a vehicle.

Analysis

So, what are the take-aways from this case?

First, there are car finance deals out there for debtors currently in bankruptcy or newly discharged. You will pay a higher interest rate but lenders will loan the money.

Second, if you are in the middle of a Chapter 13 case, you need to arrange a deal before filing anything with the court. Bankruptcy judges do not like to deal in hypothetical situations – you need to have a proposed deal on the table for the judge to analyze.

Third, you and your lawyer cannot control what the judge will do. In my experience, judges are not going to leave you high and dry when it comes to something as essential as daily transportation, but you should not expect the judge to rubber stamp your motion to incur new debt. The judge’s concern about the type of vehicle is not surprising. Bankruptcy judges expect Chapter 13 (and Chapter 7) debtors to reduce their standard of living and eliminate all non-essentials.

Finally, our experience in this case show that we can get creative when we need to make things happen quickly in a bankruptcy case. Until now, I have never served anyone by email or fax but given the low likelihood that anyone would object to this motion, we were able to use these non-traditional means of service. I doubt that I would be able to use fax or email service if I was modifying the debtor’s plan to reduce payments to all creditors.

I hope this case study of the “new loan while in Chapter 13 bankruptcy” was helpful to you. If you have any questions about Chapter 13 or Chapter 7 or about any debt issues, please contact my office.

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

Comments

  1. This is very well put together. The other question that often gets raised by my clients is whether or not their plan payment can be reduced to offset the new car payment. Sadly, that answer is no more often than yes.

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