First off, one big caveat: I am writing about Chapter 13 bankruptcy as practiced in Western Pennsylvania. Specifically, this is the Court known as the Western District of Pennsylvania.
As discussed in a previous post, all secured loans (for example, car loans and mortgages) are paid “inside the plan” on a monthly basis in Chapter 13 cases in Western Pennsylvania. As a longtime Pittsburgh bankruptcy lawyer, I can assure you that the Court here in Pittsburgh will not typically confirm a case in which a Chapter 13 debtor proposes to pay his or her car loan or mortgage directly to the lender. Instead, that monthly payment must go to the Chapter 13 Trustee, who will then remit the monthly payment to the lender.
What happens then if you need a new car while in Chapter 13 bankruptcy? The rules may be different in other parts of the country, but here in Western Pennsylvania, you must obtain a Court Order from your Judge approving the terms and conditions of the proposed car loan. As you might imagine, no car lender will approve you for a loan while you are in Chapter 13. Some of the lenders still give the erroneous advise to prospective borrowers that they “have the Trustee write you a letter saying they approve you for a loan”. This is absolutely wrong information! Here in Western Pennsylvania, the Chapter 13 Trustee does not write such letters. Moreover, it’s not a letter, but rather a Court Order from the Bankruptcy Judge in your case which is required.
So, how is this Court Order obtained? First, you should go to several car dealerships to see what types of cars best fit your needs and are within your budget. Be honest with the salesman and tell him that you are in Chapter 13 bankruptcy and that you realize that you must eventually get a Court Order permitting such a loan.
Second, contact your attorney and be specific about the terms and conditions of any proposed car loan. Your attorney and the Judge will want to know the approximate monthly payment, the interest rate and the amount to be borrowed. Your attorney must include all of those details within a “Motion to Approve Financing”, which would then be filed with the Court. A hearing would then be scheduled approximately 4 to 6 weeks later. If you have an emergency (for example, your existing car has been totalled), then the Court would likely schedule an expedited hearing, to be held one to three weeks later.
Will the Judge approve your motion for vehicle financing? Generally, yes, however if you’re proposing to purchase an expensive vehicle or a luxury vehicle, then the Judge might deny it. Additionally, the Chapter 13 Trustee may object to you borrowing more money if you are in arrears with your Chapter 13 plan payments.
Finally, presuming that the Judge approves your car loan proposal, you must now file an amended Chapter 13 plan which includes your new car payment.
If you have further questions or comments, please let me know.