Can I buy a car before filing Chapter 7 or Chapter 13 bankruptcy?

It’s generally unwise to spend large amounts of money before filing for bankruptcy. But for many, a working car is a necessity — even if they are already in financial distress. There are a few circumstances where buying a car before bankruptcy might make sense.

If you can buy a car without an auto loan or are purchasing a car valued under your state’s exemption limit, it should be protected from bankruptcy proceedings. Ultimately, this is a discussion to have with a bankruptcy attorney who can walk you through your situation and state regulations.

Factors to consider when purchasing a car before bankruptcy

You can buy a car before bankruptcy, but it’s not always the best course of action. Depending on your access to other forms of transportation, the value of the vehicle and your ability to secure a loan, you may want to go without until you’re in a better financial position.

Whether the vehicle will be protected

The bankruptcy trustee or your lender will likely require you to reaffirm your debt, meaning you will continue to make payments on it as you did before filing for bankruptcy.

That being said, your car will be protected from repossession during bankruptcy if your equity in it doesn’t exceed federal or state exemptions. However, you must continue to make payments according to your loan agreement — either the original or a revised contract — in order to avoid default and repossession after bankruptcy.

The equity is determined by the car’s value compared to the amount you owe. When you’re looking for vehicles before bankruptcy, ensure your equity won’t exceed the exemption amount — either $4,000 or a limit set by your state. If the car you buy does, you may be forced to sell it to pay off other creditors.

Learn more: Best auto loan rates

Type of bankruptcy being filed

Chapter 7 bankruptcy allows you to keep your vehicle if your equity is under the exemption limit. So if you are considering Chapter 7 bankruptcy, ensure your equity in the car you purchase is worth less than your state’s exemption limit.

If it is above the exemption limit, unless you can use the wildcard exemption rule, your car could be repossessed and sold to cover your debts.

Chapter 13 bankruptcy, on the other hand, creates a payment plan for your current debts, including anything you owe on the car. If you can’t repay this, you’ll need to sell the car yourself or turn it back over to the lender.

With either type of bankruptcy, you may reaffirm the loan with your lender’s consent and keep it out of the bankruptcy process. As long as you can continue making payments as agreed upon, you will not lose your vehicle to repossession.

Alternatives available in your area

Finally, consider the alternative options for transportation in your area. If your current car is on its last legs and you don’t have access to reliable transportation, buying a car might be a necessity.

However, living somewhere with reliable and affordable public transportation — compared to a car payment, maintenance and insurance costs — may mean you can get by without a vehicle during bankruptcy, especially if you can’t find a vehicle that is valued at less than your state’s exemption amount. Ride-sharing and friends may also be able to cover your needs.

In this case, it could be worth holding off even if buying a car won’t disrupt the bankruptcy process.

The bottom line

If you truly need a car and can find one that costs less than your state’s exemption limit, buying a car before bankruptcy may be a smart move. It’s easier to find financing without bankruptcy on your record. However, discuss a big purchase like this with your bankruptcy attorney first. Your attorney will understand your unique situation and be able to guide you through the specific laws and regulations in your state.