Can I Purchase a Car Just Before I File Bankruptcy If I Plan to Reaffirm?
Filing Chapter 7 bankruptcy may not protect your car from creditors. If you're still paying off your auto loan, your lender may be able to repossess the car unless you agree to "reaffirm" --- to keep paying off the debt just as if you hadn't filed bankruptcy. If you buy the car right before you file, reaffirmation may help you keep the vehicle, but buying could still be a serious error.
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Reaffirmation
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Chapter 7 bankruptcy wipes out debts such as home, auto or boat loans that are secured by a lien, or claim on your property. What it can't do is wipe out the lien. As a result, your lender can foreclose or repossess if you stop making payments. Even if you do make payments, attorney David Kelly states on his website, certain lenders may claim that filing bankruptcy breaks your loan agreement, which gives them the right to repossess anyway --- unless you reaffirm.
Timing
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If you need to buy a car, attorney Carmen Dellutri states on the Bankruptcy Law Network, there are advantages to buying right before you file. If your credit is good, buying before the bankruptcy affects it will probably get you a better deal. If you keep up the payments, that helps rebuild your credit. If you have bad credit already, Dellutri recommends you save money and try to keep your current vehicle running as long as possible.
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Drawbacks
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The problem with reaffirmation, Kelly states, is that if your financial situation is bad enough to file for bankruptcy, the last thing you should do is commit to a new debt. If you don't reaffirm, it's much easier to walk away from the loan: If your car is destroyed in an accident, for instance, your loan company can't require that you keep making payments. In Kelly's view, drivers are better off giving up the car than reaffirming the loan.
Considerations
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Buying a luxury car or trading up to a new model when you don't have to can be a serious mistake, bankruptcy attorney Reed Allmand states online. The bankruptcy court's duties include determining if you're filing Chapter 7 in "bad faith" --- that is, you can afford to pay your creditors but you're trying not to. Luxury purchases right before filing can be a red flag for the court: In one case Allmand cites, a man bought a $20,000 motorcycle four months after buying a new car. The court didn't allow him to file Chapter 7.
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