Taking Out A Car Loan Before Filing Bankruptcy

Let’s say your financial life is a mess.  Your income doesn’t cover your bills, you don’t answer the phone because the bill collectors are screaming at you 24/7, you’re afraid to leave the house because Don Corleone is about to sic Guido the Thumbreaker on you because of the debt you owe to The Family, and even your mom is asking if she can have back that ten spot she loaned you last month.  What you need to do is file bankruptcy - and then drive far, far away to start a new, debt-free life.  The problem is, you can’t even drive around the block because your car is on its last legs, held together by bailing wire and Bazooka Joe bubble gum and the tires have air showing through.  Before you file, can you take out a loan (if you can find a lender) or gather together a few meager shekels to buy a new car to get out of Dodge once the dust settles?

As a general rule of thumb, it is not advisable to transfer assets or make significant purchases during the time period leading up to filing for bankruptcy.  However, sometimes a person facing bankruptcy has no choice but to purchase a vehicle right before filing.  If the debtor pays for the car with cash, she will need to ensure that the value of the vehicle is covered by her available exemptions allowed by the bankruptcy code, or she could risk losing the vehicle to the trustee or paying the trustee money to cover the value of her new vehicle not protected by the exemptions. 

 If the debtor is financing the purchase of a vehicle right before filing, she could also run into some problems.  When a vehicle is purchased with a loan the lender needs to file paperwork with the state within 30 days of the purchase. This is called “perfecting” its lien on the vehicle.  The lender’s security interest is not perfected unless and until this is completed.  If a debtor files for bankruptcy before the lender’s security interest is perfected, the lender is just a general unsecured creditor and has to stand in line with everyone else to try and get paid back, which isn’t likely. 

Meanwhile, the trustee is allowed to avoid or undo payments of $600 or more that the debtor makes to any one unsecured creditor during the 90 days before filing.  Since the lender was a general unsecured creditor up until the time the lien was perfected (hopefully prior to 30 days after purchase of the vehicle), it means the trustee can void all funds given to the lender, including any down-payment, so long as the total amount transferred to the lender is more than $600.  At that point, the debtor will emerge from bankruptcy finding herself in significant arrears to the lender.  She will either have to surrender the car or pay back to the lender all the money the trustee took. 

If the debtor files for bankruptcy prior to the lender perfecting its interest, the debtor will be deemed to own the vehicle free and clear.  Just as if the debtor had purchased the vehicle with cash, in this situation the trustee could actually seize the vehicle if there are not enough exemptions available to cover the value of the vehicle.  If a debtor must finance the purchase of a vehicle before filing, she will want to ensure the lender has perfected its lien within 30 days after the purchase of the vehicle and she will then want to wait 90 days to file, unless the lender would be receiving less than $600 during the 90 days before filing.  

If all of this sounds really, really, complicated, that’s because it is.  If you find yourself staring at the ceiling all night,  sweating through your jammies with heart palpitations because of unpaid bills and a million questions about what to do next, don’t go it alone.  At Morgan Hill, we have helped hundreds of people throughout the years navigate the rough waters of bankruptcy, and we can probably help you, too – or at least answer your questions so you can start to formulate a plan.  Give us a call!