Let’s say you have 2 old cars, a 1995 Camry, and a 1990 Taurus. You have $100,000 of credit card debt. You and your wife are both registered nurses and your combined household income with both of you working 2 jobs each is $250,000. You lost two investment properties in Las Vegas resulting in one 2nd trust deed of $80,000 on collection and threatening to garnish your wages. Both the Camry and the Taurus need constant repairs. The last repair was $3,000. You decide to trade in both cars for a brand new MB E 350, and a Lexus 400. The payment for the M-Benz is $950 monthly and $900 for the Lexus. Because of the two car payments, you cannot pay the $3,000 monthly for interest on the credit cards. So, after 4 months, you decide to seek bankruptcy relief. Will the fact that you traded in your old cars for new cars which require almost $2,000 of monthly payments 4 months before bankruptcy affect your ability to get a discharge?

The general rule is there is nothing wrong with pre-bankruptcy planning. Debtor can convert non exempt assets into exempt, trade in assets and assume new debt to buy a new car if that is justified, right before bankruptcy. However, the circumstances are relevant. In this example, debtor should keep evidence of the $3,000 car repair bills because that is evidence that the cars needed to be replaced. But note that debtor in this example bought two luxury cars requiring $2,000 of monthly payments. In some cases, the kind of car purchased pre-bankruptcy does not raise a red flag. But I have heard a judge opining that if debtor bought a civic, that’s a normal car, but M-Benz is a luxury car. It all depends on what type of bankruptcy is being sought. In a Chapter 13, the trustee may raise a good faith issue if debtor attempts to deduct the new car payments in calculating the plan payment.

In Re Williams, six days before they filed for Chapter 13 relief, the above-median income debtors owned three cars: 1996 Buick Skylark, 2007 Lexus RX-400H, and a 2007 Lexus ES-350. The Buick was fully paid. They bought a new 2011 Lexus RX-350 SUV on August 5, 2011, for $47,000. They traded in the 2007 Lexus RX-400H and the 2007 Lexus ES-350 as part of the same transaction for which they received a net credit of $14,111. They borrowed $35,000 to pay for the new car, payable over 75 months at $565 monthly whereas the monthly payment on the 2007 Lexus RX-400H was $484 and $866 for the 2007 Lexus. There were 12 payments left on the former and 24 payments left on the latter. They filed for bankruptcy on August 11, 2011. The trustee objected to confirmation of their plan partially on the ground that it was filed in bad faith.