How to Trade in a Car That Is Under Bankruptcy

Chapter 13 bankruptcy allows people to incur debt during the process --- including trading in a car. The courts have little choice because Chapter 13 takes so long to complete: three to five years, with debtors sometimes needing credit for necessities like reliable transportation to get to work. Car payments on a trade-in are an additional debt not covered by the Chapter 13 repayment plan. This means you must make your regular monthly payment to the bankruptcy court and also make a separate payment for the trade in. If you fail to make the car payments the car will be repossessed.

Instructions

1

Find a car dealer willing to accept your car as a trade-in and arrange for financing despite your bankruptcy credit status. Because of the active bankruptcy you will not qualify for standard financing through a bank or credit union. So-called "bankruptcy financing" through a dealer is your only option.

2

Choose a car to buy from the dealer and get the terms in writing. Ideally the trade-in allowance should be enough to cover any remaining balance on the existing auto loan, if there is one. If the trade-in allowance is less than what is owed, consult your attorney or the bankruptcy trustee about surrendering the car to the lender to eliminate the debt. Then buy a car from the dealer with a new loan after receiving permission from the court.

3

Obtain a legal bankruptcy form called a "Motion To Incur Debt." Get the form from your bankruptcy attorney or a bankruptcy court clerk. Fill out the form to include required details of the trade in and financing, such as the anticipated monthly payment.

4

Submit the form to the bankruptcy court with copies to all your creditors listed in the bankruptcy. Creditors have a legal right to object to you taking on new credit during the bankruptcy, and a hearing before the bankruptcy judge will be scheduled if they do object. The car you wanted could be sold by the dealer in the interim.

5

Address issues raised by the court or the bankruptcy trustee. The trustee may have concerns about your ability to make the car payment while continuing with your court-ordered payment plan to creditors. Consult with your bankruptcy attorney or address the issues on your own. Once the trustee agrees with the purchase she will forward the motion to incur debt to the judge for his approval.

6

Take the signed motion to incur debt to the dealership and complete the transaction. Select another car if the one you wanted is no longer available.