The Short Answer
Yes, you can purchase a new vehicle while in a Chapter 13 bankruptcy — but you must get permission first. Depending on the loan amount, that approval comes from either the Chapter 13 Trustee (via a Request for Credit Authorization) or the bankruptcy court (via a Motion to Incur Debt). You'll need to show that you're current on your plan payments, that your amended budget can handle the new payment, and that the vehicle is necessary for your plan to succeed. Contact your bankruptcy attorney before you step foot in a dealership — buying a car without court approval can seriously jeopardize your case.
Many times during a Chapter 13 bankruptcy the debtor will need to purchase a new vehicle. A Chapter 13 is usually between three to five years in length. During this time, it is common for a vehicle to begin having mechanical problems and sometimes need to be replaced with another, newer, vehicle. Should you need to purchase or replace a vehicle while you a?re in a Chapter 13 bankruptcy, it is very important you contact your bankruptcy attorney in advance so that he or she can discuss the process with you.
In the event you need to purchase or replace a vehicle while you? are in a Chapter 13 bankruptcy, you will need to obtain approval to incur debt from the Chapter 13 Trustee and/or Court.
Request for Credit Authorization for the Bankruptcy Trustee
This is done by submitting a Request for Credit Authorization to the Trustee. The Bankruptcy Court permits the Trustee to approve credit authorization requests up to a certain loan amount (the maximum loan amount varies depending on the state and district your bankruptcy case was filed.) Your attorney will provide you with the information and necessary forms needed in order for you to obtain approval from the Trustee. In addition to completing a Request for Credit Authorization form, you will also be required to amend your budget.
Motion to Incur Debt with the Bankruptcy Court
If you are trying to obtain above a certain amount of debt to purchase a vehicle then must obtain permission from the bankruptcy court. To file a Motion to Incur Debt you need to communicate with your bankruptcy attorney and ensure they have the information they need to appropriately file the motion. Usually your attorney will need to know the amount you are looking to finance, the interest rate on the loan, the monthly payment and the time period you will be paying the loan back for.
A few important things for you to keep in mind should you need to obtain credit authorization approval from the Trustee or file a Motion to Incur Debt with the bankruptcy court is that he/she will be checking to see if you are current on your Chapter 13 plan payments and will be reviewing your amended budget to see if you can afford the new car and have the ability to make the new vehicle payments. You also will need to show having a new(er) vehicle is important to the success of your Chapter 13 plan. If the financing you are seeking to obtain for new vehicle within a Chapter 13 bankruptcy is reasonable then the Trustee or courts will almost always approve your financing request. Your bankruptcy lawyer can help walk you through the process of obtaining financing for a new vehicle.
Key Takeaways
- You must get approval from the Chapter 13 Trustee or the bankruptcy court before financing a new vehicle — buying one without permission can put your entire case at risk.
- A Request for Credit Authorization goes to the Trustee for loans under a district-specific threshold; larger loan amounts require filing a Motion to Incur Debt with the court.
- The Trustee will verify that you are current on your Chapter 13 plan payments before approving any new credit.
- Your budget must be amended to show you can afford the new vehicle payment on top of your existing plan obligations.
- You'll need to demonstrate that replacing your vehicle is necessary for the success of your Chapter 13 plan — convenience alone is not enough.
- Reasonable financing requests are routinely approved, so working with your bankruptcy attorney early in the process makes approval far more likely.
Attorney Insight
The mistake I see most often is a client who goes out and buys a car — sometimes even signs the financing papers — and then calls us afterward to let us know. At that point, we're in damage-control mode, because incurring debt without court approval is a violation of your plan and can give the Trustee grounds to move for dismissal. Here in the Middle and Western Districts of North Carolina, the trustees take plan compliance seriously, and an unauthorized car loan is exactly the kind of thing that gets flagged. Get your attorney involved before you ever walk into a dealership — the approval process is usually straightforward when the financing is reasonable and your payments are current.
