Car Lenders Should be Weary of Pre-Bankruptcy Purchases

Bankrate poses an interesting reader question: Should I buy a car before filing Bankruptcy? Bankrate’s response is measured, and it focuses on ability to pay for the car, balanced with the assumption that the debtor will get better loan terms pre-Bankruptcy than after.

This is pretty common, whether it be borrowers strategically buying with their pre-Bankruptcy credit score or non-strategically buying a car without regard to their finances. Cars, being fairly important to get to work and around town, then become an issue in the bankruptcy case, as the debtor can’t simply surrender it to the creditor.

The changes to the Bankruptcy Code in 2005 recognized this issue and included protections for car lenders. In 11 U.S.C. Sec. 1325(a), Chapter 13 debtors must repay the full debt associated with any vehicle purchased within 910 days of the bankruptcy filing. (In regular terms, that’s about two and a half years.)

So, maybe there’s some benefit to buying a car right before a bankruptcy, but creditors have enhanced rights for those last minute purchases.

Plus, there’s an argument that incurring substantial credit before filing bankruptcy is deceptive  ( i.e. where someone buys a $30,000 car, while also planning a bankruptcy filing), and such transactions could be fraudulent and excepted from discharge. Not to mention, if the filing follows the purchase too closely, the Bankruptcy Trustee may be able to void the transaction and sell the car.

Long story short, you probably shouldn’t buy a car before filing for bankruptcy.

Author: David

I am a creditors rights and commercial litigation attorney in Nashville, Tennessee.

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