Chapter 13 debtors enter into a court-approved plan to pay down their debts over three to five years. If you’re in Chapter 13 bankruptcy, the court wants your payment plan to succeed. There’s no legal prohibition against trading in your car if it's no longer reliable, particularly if you need it to get to work and earn money with which to fund your plan, but you must get special permission from the court first.
Contact Your Trustee
Contact the trustee assigned to your case. If your trade-in vehicle is paid for, you’ll be taking on an additional monthly debt that might affect your ability to make your plan payments to the trustee. If you’re swapping one financed vehicle for another, however, your car payment might not change much. Either way, it’s a good idea to get the trustee’s agreement before you proceed. You're not stonewalled if he doesn't give his consent, but it can make it more difficult to get the court’s permission.
File a Motion
Your next step is to convince the bankruptcy court judge that trading in your car is a good idea. Download a motion form from the United States Courts website. The motion allows you to explain, in writing, why you need a new vehicle. Ideally, you’ve already identified the car you want to buy and you've found a lender willing to finance it while you're in bankruptcy. Tell the court how much you must finance after your trade-in is accounted for and let the judge know what your new car payment will be. Explain why you're making the request. Maybe repairing your old vehicle would cost so much that it makes no sense to spend the money, or you might have just had a baby so your two-seater sports car doesn't meet your current needs. You'll need a good reason; simply wanting a new car because you’re tired of the old one probably won’t sway the court. If you have the trustee’s consent, mention this.
Amend Your Schedules
When you file your motion with the bankruptcy court, you might want to include amended schedules, the forms you submitted with your petition when you first filed for bankruptcy. Trading in your car for a new one is most likely to affect Schedules I and J, the documents that detail your monthly expenses and the income you have available to meet them. This isn’t technically a requirement in all bankruptcy districts, but it can’t hurt to show the court that you can handle the change in your finances without it affecting your plan.
Modify Your Chapter 13 Plan
If you think your new car payment will make it difficult for you to make your existing payments to the trustee, you can ask the court to modify the terms of your Chapter 13 plan. The judge might give permission to cut back on the money your plan gives to unsecured creditors, reducing your payments a little. These are nonpriority debts that typically aren’t paid in full in a Chapter 13 bankruptcy, but unsecured creditors must receive at least as much as they would have if you had filed for Chapter 7 instead. You might have to appear in court to present your request to the judge in person, in addition to filing the motion. If he approves your request, he'll issue an order allowing you to trade in your old car and purchase a new one. Your old lender must agree to the trade-in and release its lien against your old car before the deal can go through.
- Licker Law Firm: Can I Buy a New Car While in Chapter 13 Bankruptcy?
- US Courts: Chapter 13 - Bankruptcy Basics
- US Courts: Bankruptcy Forms
- Auto Credit Express: Steps to Buying a Car During Chapter 13 Bankruptcy
- United States Courts. “Chapter 13 - Bankruptcy Basics.” Accessed Aug. 18, 2020.
- United States Courts. “Discharge in Bankruptcy - Bankruptcy Basics.” Accessed Aug. 18, 2020.
- United States Courts. “Chapter 7 - Bankruptcy Basics.” Accessed Aug. 18, 2020.
- United States Courts. “Instructions, Bankruptcy Forms for Individuals,” Pages 33-34. Accessed Aug. 18, 2020.
- United States House of Representatives. “11 USC 1325: Confirmation of Plan.” Accessed Aug. 18, 2020.
- United States House of Representatives. “11 USC 330: Compensation of Officers.” Accessed Aug. 18, 2020.
- American Bankruptcy Institute. "Success Rates in Chapter 13." Page 1. Accessed Aug. 19, 2020.
- United States House of Representatives. “11 USC 1322: Contents of Plan.” Accessed Aug. 18, 2020.
- Nolo.com "Steps in a Typical Chapter 13 Bankruptcy Case." Accessed Aug. 19, 2020.
- U.S. Bankruptcy Court Eastern District of Michigan. "How to File a Motion for Relief From the Automatic Stay." Accessed Aug. 19, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.