Financing a used car before filing Chapter 13 in NC

[CTSMOM]

I’m currently in the process of filing Chapter 13. I have retained a lawyer and begun submitting the paperwork to get started. I will be on the five year payment plan. I have a 2008 Honda with 218k miles and know that I will need a new car sooner than later. My question is should I get a used car with an auto loan and then file? I know I will need to check with my lawyer, but just wanted to know if anyone has done this or has any advice. Thank you!

[justbroke]

You should get a new car before filing. It's that simple. You do not want vehicle issues while in your Chapter 13. Your lawyer may not directly say go buy a new car, but may say "having a new car is a good thing."

[shipo]

CTSMOM, my lawyer actively advised me to buy a new car before my Chapter 13; at the time I had 14-year old Honda Accord with the initial tell-tale signs of rust and over 150,000 miles on the odometer. I chose to disregard my lawyer's advice and soldier on with the old Honda. Long story short, while the engine, transmission, and other drive-train components were still sound, by the time the old girl made it to the 200,000 mile mark during the fourth year of my bankruptcy, it had a fuel tank leak due to rust, a fuel line leak, also due to rust, a corroded radiator, and the trunk was taking on water whenever it rained, once again, due to rust. The final straw was when the brake lines rusted through and suddenly failed while I was on a freeway on-ramp.

The only bright side to this is I had seen the handwriting on the wall, and instead of spending the $3,000 the Honda needed (before the brake line failures), I had saved that money and was actively looking for a new(er) used car. My patience was rewarded when I found a slightly newer car, in much better shape than the Honda, for about the same cost as the repairs would have been.

So, take justbroke's advice and my cautionary tale to heart and buy a new(er) car.

[justbroke]

I strongly suggest that if you have DMI to buy a new car. You get two benefits in a Chapter 13. First, you get the ownership allowance (to make payments) of $508 per car. Second, you get the "operating" cost allowance of $210/month. (Hint: this actually works for Chapter 7s as well.)

Here's the primary issue and how this can be an advantage (which I took). If you have an unencumbered vehicle (no loan), then you don't get that $508 "allowance" on the Means Test. That right there could be DMI going to the unsecured creditors. Additionally, some Trustees argue over whether you get the "operating" cost for a vehicle with no loan and under 75,000 miles and 7 years of age. For truly older vehicles the trustee will generally allow the $210/month operating allowance. The real issue becomes if the actual cost of operating that older vehicle exceeds the $210/month allowance. For example, it's constantly in the shop, burning oil, and generally unreliable causing you to rent, take cabs/Uber, or losing work.

Scenario 1: Justbroke completed her means test and has $800 in disposable monthly income (DMI). Justbroke has a vehicle without any loan. The vehicle is newer (less than 75,000 miles and less than 7 years old), so the Trustee argues successfully that justbroke can't claim the ownership or the operating allowances. However, justbroke has continuing issues with the vehicle of about $100 a month or $1,200/year. That's $6,000 over the life of the plan that justbroke had to fund out of the existing allowances.

Scenario 2: Justbroke completed her means test and has $800 in disposable monthly income (DMI). Justbroke has a new car with a monthly payment of $325/month. Since the vehicle is encumbered (has a loan) the Trustee does not make any attempt to stop justbroke from claiming both the ownership and the operating allowances. Justbroke's DMI, on the means test is now $82 ($800 - $508 - $210). Justbroke has a new reliable vehicle and will likely have no "major" mechanical issues since the new vehicle has a 36,000/3-year warranty (or better with extended warranty).

As you can see, scenario 2 appears to be the win for justbroke. By obtaining a new vehicle and using the DMI that would otherwise go to unsecured creditors, justbroke has potentially avoided car issues later, while obtaining a new vehicle prior to filing. This is especially important in a Chapter 13 that has a duration of 5 years.

But, please take this with a grain of salt. If you don't have the DMI then you can't "afford" to do this. This should only be done where you have DMI and room within your income, expenses, and DMI to justify this. You don't want to actually have negative DMI because that means some area of your expenses will suffer.

In my particular case I was able to create a decent savings from the ownership/operating allowance and my actual costs. This allowed me to easily deal with oil changes and new tires. Since I had a new car with an extended 5 year warranty, my only unanticipated cost, ever, was when I had to pay a deductible for a cracked windshield.

[shipo]

And had I followed my lawyer's and justbroke's advice, it wouldn't have cost me anything for my car payment (given it reduces the DMI) for the five years AND I wouldn't have needed to scrimp and save to be able to pay cash for a new(er) car. In my case, the only positive is I really like the car I ended up with, and even with the pending end to my Chapter 13, I am in no hurry to replace my "new" 2006 vintage car, even though it has 165,000 miles on it.

[CTSMOM]

Thanks for your input. I will have to see about the DMI. I just don’t want to be stuck with transportation. Also, for those who say get a car before I file. I know I will check with my lawyer. I’m set to sign on Tuesday. I guess my question is if she agrees do I get the car and wait 30 days to file? Will that payment be included in my payment plan? Any input is GREATLY appreciated. I have been approved already.

[shipo]

My understanding is, yes, it will be included in the plan and given it is secured debt, it will be fully paid; the most significant benefit is the payment will reduce your DMI. In essence, what you pay monthly into the plan should not change, however, your car payment will be part of that payment.

[sophieanne]

Hi CTSMOM - Welcome to the start of a better financial life . When we went to file our lawyer told us to buy a new vehicle a couple weeks before the paperwork was filed. The car payment was included in the plan..in fact 1) the interest rate was reduced by the court and 2) it was my only secured debt that was paid through the plan (although the house is part of the bk estate, we were able to pay it on our own) and the trustee actually paid the loan off within the first 6 months of the plan (he didn't pay anything else during that time and our very large payment allowed him to do that). Good luck as your start this journey.

[CTSMOM]

I think that might pose a problem for the DMI. My house has equity and I’ll be paying back my creditors over the five years. If I had a car loan would that take priority over my unsecured accounts?

[justbroke]

I think that might pose a problem for the DMI. My house has equity and I’ll be paying back my creditors over the five years. If I had a car loan would that take priority over my unsecured accounts?

Yes. The long answer is that a car payment is secured debt. All secured debt takes priority, which means your house payments take priority as well. Unsecured debt is paid after all secured, administrative (e.g. Trustee and attorney fees), and priority debt.

If you have significant leftover DMI even with an "older" car in your potential plan, it may be better to spend the DMI on a newer vehicle. A potential issue may come for people in a 100% plan with very little actual DMI. If you are not in a 100% plan, then the only thing that matters for this particular bankruptcy planning suggestion, is that you actually have DMI to cover the new payments.

[flashoflight]

It's obvious for those with DMI to get a new(er) car and try to finance the most extensive bumper to bumper manufacturer's extended warranty, service warranty, credit insurance, and anything else you can get away with like upgraded tires (but retain the current ones if they're good). As JB says, you don't want vehicle problems while in the 13.

I think the more interesting case is what to do when you have hardly any DMI which means you don't have room for another auto loan payment. In that case, I would act like a regular non-BK cheapskate and buy a reliable used car with cash (eg. tax refund pre-petition) that is known for lasting to 300k miles like some Toyotas and Hondas. Don't buy cute. Don't buy SUV. Don't buy trucks. Don't buy luxury even if it is cheap. Basic reliable transportation that is ideally fuel efficient. You will need to avoid exceeding your vehicle exemption amount when you pay cash, so check with your lawyer on exemptions before purchase.

If you have a step-up plan from completing another auto loan or 401k loan, that will produce DMI that can be sucked up with a motion to incur debt when your junker dies. Don't think you have to last the entire five years with the junker in that case. Keep in mind it may be good to keep some DMI as long as possible in case of surprises like your mortgage payment changing due to escrow or interest increases or if you need a new roof so don't replace the car until it really needs to be replaced.

[shipo]

If you have a step-up plan from completing another auto loan or 401k loan, that will produce DMI that can be sucked up with a motion to incur debt when your junker dies. Don't think you have to last the entire five years with the junker in that case. Keep in mind it may be good to keep some DMI as long as possible in case of surprises like your mortgage payment changing due to escrow or interest increases or if you need a new roof so don't replace the car until it really needs to be replaced.

I entered Chapter 13 with a 14 year old Honda Accord which I was banking on lasting the full five years. The car made it a little over 3.5 years before corrosion took over and wasted the radiator, brake lines, brake calipers, fuel lines, the gas tank, and the trunk (it would fill with water when in the rain, regardless of whether it was being driven or parked). The full cost of the mechanical repairs was upwards of $3,000, not including the trunk which I didn't even have quoted. Long story short, the car was toast. In the end I wound up with another Honda product, this one only 11 years old at time of purchase, but it M-U-C-H better shape than the old Accord.

The moral of this story is, not buying a new(er) car before Chapter 13 is survivable, but if you have any DMI at all (I did and ignored my lawyer's advice to buy a car), buy that car!

[justbroke]

flashoflight and shipo both make excellent points. I want everyone to have a survivable Chapter 13 but as we are all saying, don't put yourself in jeopardy either by having payments you can't really afford, or a car that won't make it through "most" of the Chapter 13.