Buying a Car While in Chapter 13: The Critical Steps Every Debtor Must Know

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Reliable transportation is vital for every Chapter 13 debtor, but purchasing a vehicle while in your repayment plan is strictly regulated. Before you incur a new obligation, obtaining a car loan requires explicit court permission and approval from the Chapter 13 Trustee. Ignoring this process and taking on new debt prematurely can result in serious consequences, including the dismissal of your bankruptcy case.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways for Chapter 13 Debtors

• You must obtain formal permission from the Bankruptcy Court and the Chapter 13 Trustee before signing any new vehicle loan agreement.
• The Bankruptcy Trustee views a new loan as diverting funds from unsecured creditors.
• You must prove you can afford the new car payment in addition to your existing Chapter 13 plan payment.
• The Vehicle Must Be “Reasonable and Necessary”:
• The Till Standard: The Trustee reviews the Annual Percentage Rate (APR). If the rate is predatory or simply too high, they will object.

A Necessary Purchase Requires Court Permission

Reliable transportation is not a luxury; it is a fundamental necessity for nearly every Chapter 13 debtor. It is often the key to maintaining employment, fulfilling plan payments, and successfully emerging from bankruptcy.

However, the three-to-five-year Chapter 13 repayment plan comes with a critical, non-negotiable rule: The debtor must obtain permission from the Bankruptcy Court and the Chapter 13 Trustee before incurring any new debt, including a vehicle loan.

Ignoring this step, signing a loan agreement or taking possession of a vehicle before formal approval, can result in the car being surrendered, the loan being voided, or even the dismissal of your entire bankruptcy case. If your case is dismissed, you lose the protection of the Automatic Stay, so creditors can pursue collections.

Why the Chapter 13 Trustee Will Object to Your Car Loan Motion

The Chapter 13 Trustee’s main responsibility is to protect the bankruptcy estate, which means committing all available disposable income to creditors. When a Motion to Incur New Debt for a car loan is filed, the Trustee views it as a request to divert funds, meaning less money for the unsecured creditors since those funds are now being used for the car loan (secured creditor).

The Trustee’s objections typically fall into three primary categories, all revolving around a single question: Does this new debt negatively impact the plan?

The Feasibility Objection: The New Payment is Too High

This is the most common reason for objection. The Trustee analyzes the debtor’s updated budget to determine if the proposed new car payment makes the entire Chapter 13 plan unfeasible under 11 U.S.C. §1325(a)(6).

Failure to Demonstrate Ability to Pay: If the new car payment, when combined with the existing Chapter 13 payment and other necessary living expenses, results in a negative disposable income or leaves insufficient cushion, the Trustee will object. They must be convinced the debtor can comfortably afford all obligations.

Missing or Overstated Income: The Trustee will review proof of income (pay stubs, tax returns). If the debtor’s income is inconsistent, unstable, or if the motion relies on projected income, the Trustee will argue that there isn’t enough being paid into the plan because of the new debt.

Unrealistic Budgeting: If the debtor has adjusted other necessary household expenses such as grocery bills or utilities to make room for the new car payment, the Trustee will object that the budget is not realistic. They know that an artificially reduced budget will inevitably lead to a future default, especially for those cases that barely qualified.

The “Reasonable and Necessary” Objection: The Vehicle is Excessive

The motion must prove that the new debt is both necessary and that the vehicle being purchased is reasonable. The Trustee will object if they believe the purchase price or the car itself is excessive for a debtor in bankruptcy.

Excessive Cost/Luxury: The Trustee is unlikely to approve a motion to buy a brand-new, high-end vehicle. They object to purchases that they deem to be luxury items or too expensive for the debtor’s economic station, arguing that a less costly, reliable used vehicle would suffice. The cost must be in line with what a prudent person would buy to meet a transportation need.

Excessive Interest Rate (The Till Standard): Although the debtor found a lender willing to offer a loan, the Trustee reviews the interest rate. If the APR is predatory or simply too high, the Trustee objects because the excessive interest rate results in fewer funds available for the repayment of unsecured creditors. This is known as the Till Rate, which is often defined as the Prime Rate plus a risk factor.

Excessive Loan Term: The Trustee may object if the proposed loan term (e.g., 84 months) extends unreasonably beyond the life of the Chapter 13 plan itself (36 or 60 months).

The Compliance Requirement and Poor Debtor Performance

The Trustee has little incentive to approve new credit for a debtor who is not fulfilling their current obligations to the bankruptcy estate.

Plan Payment Arrearages: If the debtor is currently behind on their monthly Chapter 13 plan payments to the Trustee, the motion is almost certain to be objected to or outright denied. The Trustee views this as evidence that the debtor cannot even handle the existing budget, let alone a new monthly car payment that increases the household budget.

The Professor’s Take: The Trustee’s objective is to prevent the debtor from taking on a new debt that increases the risk of plan failure. If a debtor fails to complete the Chapter 13 repayment plan, this results in creditors receiving minimal to zero distributions.

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You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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