Buying A Car During A Bankruptcy Or Before A Bankruptcy

2010-04-26   minute read

Linda Paul


I am assuming from your question that you are currently in bankruptcy. Just in case, I'll give you an answer for both scenarios: a) Already in bankruptcy and b) planning to do a bankruptcy.

Person talking on a cellphone looking at spreadsheets on their laptop

If you're already in bankruptcy and are planning to buy a vehicle, then yes, it is possible that the trustee would be expected to seize it UNLESS you are replacing an existing vehicle. Technically, if you buy the car outright (i.e., no financing) during a bankruptcy, bankruptcy laws require the trustee to seize it, sell it, and distribute the proceeds to your creditors. However, it does depend on the value. If the value is minimal, a trustee usually won't seize it. You should discuss this with your trustee before you make your purchase.

There are sometimes ways to protect the vehicle before you buy it. For example, if you're borrowing money from a family member to buy the car, they can register a lien against the car, meaning that seizing the car would produce no value for the creditors and the trustee would therefore not seize it.

If you're not yet in bankruptcy but are planning to be, then there are a few things to consider:

First of all, you're entitled to keep certain things when you do a bankruptcy (these are called "exempt assets"). One of these items is a vehicle up to a value of $5,000 (in BC - other provinces may be different). So, if you own a vehicle at the date you go into bankruptcy, up to $5,000 of the equity (the market value less any loans against the vehicle) is protected - the trustee does not touch that.

Secondly, if you have $5,000 sitting in a bank account and if, just before you go into bankruptcy you use that to purchase a vehicle, you'll have a problem with that. You would be using something of value (i.e., $5,000 in cash) which creditors could have seized, to purchase something which creditors cannot seize (a vehicle worth $5,000). So you'd be converting something that creditors can take into something that they can't take at a time when you know you can't pay your debts. Bankruptcy laws say that's not ok and you would likely be expected to either surrender the vehicle or pay $5,000 into your bankruptcy.

Thirdly, get some advice before you make your purchase. There may be ways that you can buy your vehicle, not lose it in a bankruptcy and not run afoul of the rules.

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