Spending Tax Refund on Car Before Bankruptcy

April 7, 2021

Can I Use My Tax Refund to Buy a Car Before Bankruptcy?

You can use your tax refund to buy a car before filing bankruptcy.  Having a paid-in-full car can make life much easier.  It can help you make your full recovery after the bankruptcy case is filed.

Buying a Car with tax refundMake Sure the Car Fits Within Your Exemptions

There is a limit to how much property you can keep in bankruptcy.  Although this limit is high ($10,250 per person in Indiana), you still want to make sure your car and all your other belongings fit within this amount.   If you have purchased a financed car, you do not need to count the entire value of the vehicle.  You first need to subtract the loan’s balance off the value of the vehicle.   You only need to count any remaining “equity” (if any) after subtracting the loan balance.

You Can Still Buy a Financed Car

Although buying a paid-in-full car is usually recommended, you can still also buy a financed car before filing for bankruptcy.  Generally, you never should incur new debts right before bankruptcy.  However, with a vehicle loan, there may be an exception.  This exception happens because you intend to repay (or keep) the vehicle after the bankruptcy case.   If you intend to repay the loan for the newly acquired financed car, then you usually are allowed to buy a newly financed vehicle before you file your bankruptcy case.

A Much-Needed Automobile Can Be Perfect

If you legitimately need another vehicle before you file for bankruptcy, then spending your tax refund on a paid-in-full car is perfect.  It is a large purchase that can both provide for a much-needed household item while spending down your tax refund cash amounts.  Any cash, money in bank accounts, or money owed to you can generally be taken by the Trustee in a Chapter 7 bankruptcy case.   The exemption (protected) amounts in Indiana are very low (only $400 per person).   Therefore, if you can convert the cash into a much-needed car, you will be providing for yourself in a legitimate way while reducing how much you could lose during your Chapter 7 case.

Remember, however, that all specific plans should be made with the advice of a bankruptcy attorney.   Although buying a car before bankruptcy is generally okay during most cases, your particular situation may require detailed advice or planning that only a bankruptcy attorney can provide.

If you live in Indiana and would like a free bankruptcy consultation, contact us here.

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