In a recent consultation, a prospective bankruptcy filer suggested that they would not be eligible to file for bankruptcy because they recently purchased a car. They were overwhelmed by credit card balances, drowning in old medical bills, struggling with student loans, and at the point where they were having trouble keeping their refrigerator full some weeks, but they had still received information from outside sources that left them setting the option of bankruptcy aside due to the purchase of a vehicle.
This situation is normal. First, as an attorney, I am not permitted to tell you to incur debt prior to filing bankruptcy. While that isn’t the exact question posed in this situation, it is related and should be stated right away. In the past, attorneys would often advise their clients to purchase a vehicle before filing. They did this for two reasons. First, the additional monthly expense made it easier for individuals and families to qualify for bankruptcy. Second, the filers might still have good credit prior to filing.
There is nothing illegal about purchasing a vehicle before filing for bankruptcy.
I’ll say that one more time: there is nothing illegal about purchasing a vehicle right before filing for bankruptcy. If you question the validity of this statement consider that most people NEED a car. Unless they are fortunate enough to live in a city with easily accessible public transportation systems, the vehicle is a vital element of their productive life. Additionally, cars die from one moment to the next. In fact, the sudden need to replace a vehicle can be the tipping point that sends someone towards bankruptcy court. Even a $200 to $400 car purchase can topple some household’s finances when the budget is tight.
In my history as a southern California bankruptcy attorney, I have never seen a bankruptcy filer denied the right to file for bankruptcy because of a recent car purchase – even if the purchase was days or weeks prior to filing. The bankruptcy process is not punitive or retaliatory. The bankruptcy filer’s credit is damaged by filing, but as long as a filer is truthful about their situation throughout the process, they are eligible to seek relief.
If you are considering filing for bankruptcy and you have to purchase a vehicle, make sure to buy based on reliability and payment amount. You want something you can depend on, that has a low payment and minimal maintenance/repairs. Now is probably not the time to purchase your dream car as they often come with nightmarishly expensive repairs and maintenance costs. Don’t focus on the interest rate. If you are about to file for bankruptcy, you probably aren’t eligible for the low rates you hear advertised. Keep your sights on a low payment and reliability of the vehicle.
I cannot advise a client to finance a vehicle before filing for bankruptcy, but I can offer my opinion when asked. Giving the best possible advice is important to me as I like to keep my clients’ best interests in mind at all times.