Can I Buy a Car or Refinance During Bankruptcy?

There are certain dos and don’ts for a debtor regarding cars and houses during a bankruptcy. After the Petition is filed and before the final discharge, debtors are severely restricted in what they can do with assets such as houses and cars.  Part of the agreement with the US Bankruptcy Court is to turnover ownership of their assets as “property of the estate” until the Bankruptcy Court issues a final discharge.

That means, debtors may not enter into major transactions, such as buying a car, refinancing a house, or selling a house without the Trustee and the Court’s approval.  Specifically, if you had to buy a car because yours was repossessed, then make sure you get Trustee and Court approval.  Otherwise, they could void the contract and force you to return the car.  Any penalties may be yours to bear.  Even worse, the Court may decide you did not operate in good faith and delay or, even worse, dismiss your bankruptcy.

Effect of Refinancing on Expenses

The Trustee and the Bankruptcy Court is very concerned that you have sudden access to new cash.  For example, a refinance may mean a lower monthly expense or even cash out of the equity.  The sale of a house may mean that the property was not properly valued.  These are all flags that affect what your Bankruptcy.

Necessary Purchases Should be Fine

However, the shackles are not as tight as they sound.  First of all, the Trustee is not known to deny a debtor from buying a car.  They understand that people need a car to get to work and they want your bankruptcy to succeed.  They just want to make sure you did not lease that dream BMW but bought a reasonable car instead.  They should approve the sale of a house or refinance if there is a specific reason, like a hardship or an anticipated interest adjustment that will cause you to fail your payments anyway.

Wait if Possible

Second, a Chapter 7 Bankruptcy can finish within 90 days so you only need to wait that short three month period. If you need transportation, then try to borrow a car, see if you can get a deal on long term rentals, or go green and use public transportation. 

If you are in a Chapter 13, be very careful because your plan payments were approved based on your income and expenses at the time of filing.  If you want to add a cost like a car or lower payments via refinance, the Trustee may decide that they want to reexamine your entire cash flow profile.  That could result in an increase in your plan payments.

What if You Already Bought a Car During the Bankruptcy?

Due to the current economic conditions, car dealers are extremely eager to sell cars.  They may overlook the fact that you are in a bankruptcy and sell you a car anyway (or it is possible they did not even know they couldn’t sell you a car without approval).  In that case, you are best to let the Trustee and Court know right away. 

Although they do have the power to punish you, the Trustee is likely to grant a post purchase approval assuming you did not buy an expensive car or does not affect your financial situation too badly.  But check with your attorney first before you start confessing. (Note: it is unlikely that a bank will refinance a home without Trustee approval since they were notified directly of the bankruptcy)

Always Disclose Financial Changes to the Bankruptcy Trustee

The key to remember is disclosure.  If you keep the Trustee in the loop of any major financial changes then you should be okay.  If you have an attorney, keep them appraised of your changes.  They should help you through the process.

A final thought: the restrictions above apply even if you want to cosign on a loan such as car loan or student loan for a child.

Eddy Hsu is an attorney experienced in the areas of Bankruptcy and Family Law.  He is admitted to practice in California and the Northern District of California Bankruptcy Court. He may be reached at 415-230-5388, and via email at eddyhsu@ehsulaw.com. The above article is informational only and not legal advice for your specific situation.  Always consult directly with an attorney to obtain legal advice.