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Which Should I Do First: File For Bankruptcy Or Buy A Car?

Which Should I Do First: File For Bankruptcy Or Buy A Car?

Bankruptcy is aimed at giving you a second chance; a fresh start with your finances. But not knowing what happens after you file for bankruptcy can be scary.

What Happens After You File for Bankruptcy?

The following things will happen after you file for bankruptcy:

A Trustee Will Be Assigned to Your Case

Once you file, a bankruptcy trustee will be assigned to your case. This trustee will be in charge of administering your bankruptcy filing. In general, the trustee will either:
• Oversee the liquidation of assets in a Chapter 7 case, or
• Oversee the repayment of debts in a Chapter 13 case.

You Will Attend a “Meeting of Creditors”

The first thing the trustee will do will be to call a meeting of creditors. This is also called the 341 creditors meeting. During this meeting, the trustee will ask you, under oath, about your assets and debts. Creditors can attend this meeting and ask you questions. But usually, it will be just you and the trustee.

An Automatic Stay Will Stop Debt Collection

Filing for bankruptcy will trigger the automatic stay. The automatic stay will ensure that creditors will not try to collect from you while your case is pending. What this means is they can’t contact you to collect on debts like credit card debts and other types of unsecured debts. The automatic stay will also stop the garnishment of your wages.

You Will Attend Financial Management Courses

Before filing for bankruptcy, you took a credit counseling course. After you file for bankruptcy, you will need to take another course that can help you after your debts are discharged through the bankruptcy process. It is only after you complete these courses that the bankruptcy judge will give you a debt discharge.

The Trustee May Sell Some of Your Property

If you filed Chapter 7, the trustee may liquidate some of your non-exempt assets and distribute them to creditors according to the priorities stated in the bankruptcy laws. You will get to keep many of your assets like some household items, your car, and items of clothing. You can learn more about this on our page about bankruptcy exemptions.

You May Begin a Repayment Plan

With Chapter 13, you must follow your repayment plan and pay off your debts within the specified time to get debt relief. You also have to pay non-dischargeable debts like child support and alimony in full.

Your Debts Will Be DischargedWhat Happens to Secured Debts?

A secured debt is a debt a creditor secures with an asset. A mortgage can be a good example here. When you buy real estate and finance that house with a bank loan, you are giving the bank the right to initiate foreclosure proceedings if you fail to comply with the mortgage terms.

In a Chapter 7 case, creditors can foreclose the property even after you file for bankruptcy if you don’t pay your secured debts. You can, however, keep the property if you make an agreement with the lender to continue making monthly payments on your loans.

In Chapter 13 cases, you can retain your property if you continue to make payments through the Chapter 13 payment plan.

What Happens After Bankruptcy?

Once your case is finalized, you will get a discharge of most of your debts. Your creditors are also legally prohibited from trying to collect any outstanding debts from you. Read on to see some of the common questions on what happens after a bankruptcy discharge.

Will You Be Debt Free? Will Bankruptcy Discharge All Debts?

No. Bankruptcy will not discharge all your debts. What can be discharged will vary based on the type of bankruptcy you choose. But in general, the following debts will not be discharged after bankruptcy:
• Student loans
• Certain tax debts
• Child support and alimony obligations
• Certain debts from criminal fines

How Will Bankruptcy Affect Your Credit Score?

A bankruptcy filing will lower your credit score and may stay on your credit report and in public records for some time. Bankruptcy will stay on your credit for 10 years if you filed for Chapter 7 and seven years if it is a Chapter 13 bankruptcy. However, exactly how much a bankruptcy will affect your credit score will depend largely on your financial situation before filing bankruptcy.

You can take steps to rebuild your credit such as:
• Staying current on your bills
• Getting a new credit card or a secured credit card
• Trying not to borrow more than you can repay

Keep in mind that filing for bankruptcy might do more to help your credit than harm it. Consider what will happen if you continue to hold the debt and miss payments.

Can You Get a New Car or Buy a House After Bankruptcy?

Getting a car loan or a mortgage will be difficult immediately after your bankruptcy case is finalized. But by rebuilding your credit, you will have options in the future. For instance, getting a secured credit card or applying for installment loans may be good options for you to start building your credit.

What If You Get Into Debt Again?

Depending on the timing between discharges, you may be able to file for bankruptcy again. Here is the timeline:
• From Chapter 7 to another Chapter 7: Eight Years
• From Chapter 13 to another Chapter 13: Two years
• From Chapter 7 to Chapter 13: Four Years
• From Chapter 13 to Chapter 7: Six Years

If you don’t qualify for another bankruptcy or you simply don’t want to file again, you also have other options to becoming debt-free.

Chapter 7 bankruptcy. The Chapter 7 trustee will sell the car, give you your exemption amount, and use the remaining amount to pay fees and creditors or force you to pay the nonexempt amount (usually with income made after the bankruptcy filing or money loaned from friends or family). The key problem you’ll want to be aware of is that if you pay more cash for the car than you can protect with an exemption, you’ll likely end up losing the car.

Chapter 13 bankruptcy. In a Chapter 13 case, nonexempt equity is handled a bit differently, but the result is similar. Specifically, the Chapter 13 trustee won’t sell the car; however, you’ll have to pay for the nonexempt portion of the vehicle in the three- to five-year repayment plan. If you don’t have enough income to fund a plan that includes repayment of the nonexempt equity, you’ll have to either:
• sell the car yourself (and likely turn over some of the proceeds to the trustee)
• let the car go back to the lender, or
• find a way other that Chapter 13 bankruptcy to handle your debt problems.

Red Flag: Converting Nonexempt Cash Into an Exempt Car

If you happen to have a large sum of money stashed somewhere, it might seem like a good idea to sink it into property that you can exempt, like a car. Why? Because most states don’t have an exemption that will protect cash or money in a bank account (or it’s very small). However, you’ll want to be wary of such maneuvers. Using nonexempt cash to purchase an exempt asset shortly before a bankruptcy case can raise a red flag (and the court will be aware of it because you’ll have to report the transaction when filling out your bankruptcy paperwork). The bankruptcy court might interpret the transaction as an impermissible exemption-planning attempt designed to keep money that rightfully belongs to your creditors. If that’s the case, you could lose the asset anyway.

Before taking such steps, it’s prudent to speak with a local bankruptcy attorney familiar with the practices in your area.

Which Bankruptcy Chapter Will You File?

Chapter 7 and Chapter 13 bankruptcy treat secured debt—like car loans in different ways. The consequences will also depend on whether the purchase occurs before or during a bankruptcy case.

• Buying a car before a Chapter 7 case. You’ll probably have the fewest issues buying on a car on credit before filing bankruptcy, as long as your car isn’t expensive and you didn’t make a large down payment. The creditor will ask you to sign a reaffirmation agreement, which removes the loan from the bankruptcy case so that you’ll continue to be responsible for payments after receiving your debt discharge.
• Buying a car before a Chapter 13 case. When you file a Chapter 13 bankruptcy, you’ll propose a debt repayment plan to the court that will last for three to five years. If you purchase a car shortly before you file that Chapter 13 case, you probably won’t be able to put your loan into your payment plan with your other creditors (unless your court has a rule that requires you to do so). You’ll pay out your car loan according to its terms.
• Buying a car during a Chapter 13 case. You’ll have a harder time replacing your car while you’re in a Chapter 13 case. You can’t just take on new debt to purchase another vehicle. If you need to buy on credit, you’ll have to search for a lender that works with Chapter 13 debtors. (You can use this online tool to see if you qualify for a car loan after filing for bankruptcy.) You’ll also have to get the approval of your Chapter 13 trustee and the bankruptcy judge and demonstrate that you have a good reason for buying a car, like to get to work. You’ll also have to show that the cost and the loan terms are reasonable and that you can afford the payments and still make your Chapter 13 plan payment. You also won’t be able to discharge (wipe out) any debt you take on while you’re in Chapter 13 bankruptcy.

Buying a Car After Completing the Bankruptcy

Most people are concerned that the bankruptcy will prevent them from getting any new credit for a long time after the case ends. That’s not usually the case. Many creditors, including car lenders, actively market to people who’ve just emerged from a successful bankruptcy case. They see a discharged debtor as a decent credit risk because you’re restricted from filing another bankruptcy case and because you’ve wiped out other debt that was causing you financial pressure. You can expect to pay a higher interest rate or a larger down payment. However, there’s an upside: If you’re careful about making your payments on time, the car loan can help you rebuild your credit. As your credit score rises, you’ll be offered better terms on future car purchases.

How Long after Filing Bankruptcy Can You Buy a Car?

While the effects of bankruptcy hang around for 7 to 10 years on your credit report, that’s not how long you must wait to borrow money. The impact of the penalty decreases each year, and it’s even possible to get a car loan within six months of your discharge. But that might not be the wisest course of action. The longer you can go without buying a vehicle, the more time you have to improve your credit score, which increases the likelihood of getting a loan at an affordable interest rate. One option: Help yourself out by getting a free copy of your credit report and checking it closely for errors so they can be removed.

If you need a car now, do you have enough cash to buy an inexpensive one to get you through the first 6 to 12 months? It may not be something you’ll be proud to be seen in, but it will give you time to improve your credit score and save for a down payment, both of which will help you get better interest rates on your next car. Bankruptcy may seem like an easy way to get out of debt. The truth is it can damage your credit score and make it difficult for you to qualify for financing in the future. If you decide Chapter 7 or Chapter 13 is right for you, make sure you’re clear on what will happen to your car and auto loan if you have one.

Free Initial Consultation with Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506