Buying a car for cash (without a loan) usually will not pose any problem for your bankruptcy filing, provided that the value of the car is covered by your applicable exemptions. However, when you take out a loan to buy a car, it can become problematic. An experienced attorney can explain the do’s and don’ts about taking out a car loan before filing bankruptcy in San Diego, so that you do not jeopardize your filing and are able to successfully obtain a fresh start.
Can I Take Out a Car Loan Before Bankruptcy?
Taking out a loan to buy a car before bankruptcy raises a couple of legal issues that could affect your filing and the success of your case. But if you follow a few simple rules, you can buy a car before bankruptcy and still have your filing proceed smoothly and successfully. Evidence of good faith will be important. Also, you must consider your lender’s potential limited right to rescind the loan. Finally, whether your lender timely perfects its lien may affect you positively or negatively.
Good Faith
Good faith is always a consideration in bankruptcy cases. If your car loan was taken out in good faith, you can usually keep your car in bankruptcy by reaffirming your car loan debt in a Chapter 7 proceeding or by repaying your car loan debt in a Chapter 13 proceeding.
Under certain circumstances, taking out a loan to buy a car before bankruptcy could point to lack of good faith. For example, if you have a car that is in perfect working condition and before you file you take out a $40,000 loan with $800 per month payments, this could point to bad faith. If you didn’t take out the loan, you would have an additional $800 per month in available cash each month that you could use to pay your creditors. The United States Trustee’s view is that an honest debtor would not take out the loan for the extra, unnecessary car, and would try and repay his or her creditors.
Loan Rescission
Many car purchase contracts that you sign at a dealership have standard language in their contracts, usually on the back side in small print, that says they have a set number of days (example, 10 days) to cancel the vehicle purchase contract if they cannot secure financing.
If you file bankruptcy within that period (example, within 10 days of the day you bought the car), then the dealer may claim, truthfully or not (if would be difficult for you to determine their true intentions), that it could not obtain financing and therefore cancel the contract.
Lien Perfection
If you take out a loan to buy a car before bankruptcy, your lender has a short amount of time (example, 30 days) to perfect its lien. If it doesn’t, then the trustee appointed by the court to review your case can avoid the lien. This can work out to your advantage, or your disadvantage.
If the court-appointed trustee avoids the lien, then your car becomes property of your bankruptcy estate and you can buy it back from the trustee usually for its fair market value, which is usually less than what you were paying to your creditor. So this would be to your advantage.
But if you don’t have the cash to buy the car back from the trustee, then you may lose your car. You could possibly obtain a loan at a very high interest rate to buy back the car with a loan. If you did that, your payments may be the same, or higher, than the original loan you took out just before bankruptcy. Better to not risk losing your car and carefully plan and discuss any proposed purchases with an experienced attorney to ensure that they will not adversely affect your filing.
To determine if your lender has properly perfected its lien, you can look on the registration and see when your lender registered itself as the lienholder of the vehicle. If you have not received your registration yet, you can ask the DMV for a “bundle” report that shows if and when your lender registered itself as the lienholder of your vehicle.
