When a debtor is in Chapter 13 Bankruptcy, the Court must approve any additional debt that a debtor wishes to incur.
What does this mean? A Debtor must seek Court permission to incur debt (e.g. car loan) before signing a contract.
- Debtor received mailing wherein used car dealer was offering car loans for those in bankruptcy.
- Car loan was for a five-year old car.
- Interest rate was: 25%
- Debtor is not only borrowing a total of $16,477.44 for a five-year old car but also finance charges of $9,853.66 over the life of the loan.
- The car when paid off would be ten years old.
- An attorney worked with the used car dealer on these transactions to invite bankruptcy clients to purchase these vehicles.
- The used car dealer said they send over 2,400 mailings per week to debtors in bankruptcy.
- Both the used car dealer and the attorney were aware of bankruptcy rules that the Debtor must obtain court approval.
Bankruptcy Court Decision:
- Attorney had to return fees of $500 received from used car dealer – coincidence that attorney fee was exactly $500 down payment from the debtor?
- The used car dealership had to return the car and the Debtor’s down payment.
- This “deal” was not in the best interests of the Debtor. The interest rate was terrible.
Court’s goal is to protect debtors in bankruptcy not to get into another situation that is not financially sound. Court must approve before debtor can sign for a car loan always.