One issue which seems to cause a fair amount of confusion, and which also causes people to do inappropriate things before going to see a lawyer, is the subject of the number of cars, and the number of car loans (if any), a person can take into bankruptcy. Frankly, the question by itself misses the point. At least on the surface, the issue is not how many cars do you have, but what are they worth? In other words, if a married couple owns one completely paid off late modeled Mercedes SL, that is a problem in bankruptcy. On the other hand, if an individual owns a five year old Toyota Camry which still has a car loan on it, a twenty year old pickup truck that he uses to haul things around, and a used car worth about $1,000.00 that he keeps for his daughter, that is probably no problem at all. The issue is not the number of cars, but how much equity is in the cars. By equity, I am referring to what you would receive if you were to sell the car after the bank holding the car loan received its money. In most cases, there is little or no equity in the car. The Trustees in bankruptcy are looking for things that they can take from you and sell and have some money to give to your unsecured creditors that are otherwise not getting paid. The No Trustee is interested in that old clunker in the side yard. The Trustee is not interested in any vehicle that has a large car loan such that after taking it and selling it, all there would be is money for the bank. Incidentally, it is also possible to keep several thousand dollars of equity in a vehicle out of the reach of the Chapter 7 Trustee. As a result, cars are rarely a problem in Chapter 7 bankruptcy. As long as people are making their payments to the bank, they can usually keep their cars. As long as the cars are of limited value, it is possible to take multiple vehicles through Chapter 7 bankruptcy.
Although the existence of cars is usually not a problem, the things people do in an effort to protect them are. The biggest problem I have had over the years is with people who believe that they cannot take a car loan through bankruptcy. I have had a number of people come to see me just weeks, or sometimes days after taking out a 401(k) loan to pay off the car. This is always a huge mistake. First of all, money inside of a 401(k) is an exempt asset, and thus out of the reach of the Chapter 7 Trustee. Simply put, the Trustee cannot take money in a 401(k). However, as a result of paying off the loan, the Debtor creates equity in the car when none existed before.
The other problem that we see quite frequently is people who will transfer their car to a friend or a relative so as to get it out of their name. The Bankruptcy Court has a special name for such transactions. They are called “fraudulent transfers”. Fraudulent transfers cause a number of problems. At least in theory, a fraudulent transfer can result in the whole bankruptcy being dismissed. The more common problem is that a fraudulent transfer can be avoided. That is to say that if someone in bankruptcy gives their car to their mother, the Trustee in bankruptcy can sue the mother to get the car back. While it is possible to protect several thousand dollars in equity in a car, it is not possible to protect the value of a property fraudulently transferred. Most of the time, when people come to see me after they have transferred property to a friend or relative so as to “keep it safe”, it is property that I could have protected had they not have transferred it. However, now that the property can be declared to be the subject of a “fraudulent transfer” there is not much I can do if the Trustee wants to come after the property. I do not represent, and there is some recent case law saying that I cannot represent, the party that received the transfer. The Debtor in bankruptcy no longer has an interest in the property for me to protect, or any claim to the value of that property. My hands are tied.
This particular blog was inspired by a potential case that came into my office not so long ago. The woman had been advised by “a friend” to borrow money from her 401(k) and pay off one of her car loans. She then received the title to the car from the bank and transferred the car to her boyfriend. She did this because she owned two cars herself and was on the title for a third which she cosigned. She was worried that going into bankruptcy with her name on three car titles would be a problem. However, the car that she drove herself had no equity in it and neither did the car that she transferred, before she paid off the loan. The car that she cosigned had very little equity in it, and there is a strong argument to be made that it is not really her car anyway. As such, there is nothing for the Trustee to take. Even if the Trustee could take and sell the car that the potential client had cosigned, there was not enough equity for the Trustee to get out from under the motor vehicle exemption, yet alone the wildcard exemptions that I could have put on top of that.
However, the car that she had paid off and transferred would be a tempting target for the Trustee. Once the car was paid off, then its net asset value becomes the full value of the car. The fact that the money to pay off the loan came from an exempt source, the 401(k), is irrelevant. In this particular case, there is now too much equity in the car even using the motor vehicle and wildcard umbrellas. However, there was probably still room to make a deal. In other words, had the Trustee have taken and sold the car and paid my client the amounts left under the umbrellas, there would not have been that much money left over. It is possible that something could have been done to get the Trustee to walk away. That something would have involved giving the Trustee money, but probably not as much money as that small equity value of the car. However, once the umbrellas went away because of the “fraudulent transfer”, the Trustee was now entitled to the full value of the car. Suddenly, the expenses associated with taking and selling the car are not very big compared to the net value of the car. The only hope we would have had for keeping the car would be for the Debtor to go to her 401(k) again and borrow a similar sum of money again and pay it to the Trustee, or have the Debtor’s boyfriend buy it from the Trustee for something not so far removed from its fair market value. All of this would have been unnecessary if the Debtor had just left things alone.
The one place where having multiple vehicles, and especially multiple vehicles with car loans, can be a problem is the budget analysis. If the Bankruptcy Court finds that you have sufficient income to pay something towards your Creditors, then the Bankruptcy Court could compel you to convert to Chapter 13 and make monthly plan payments to pay down at least part of the debt. If you have a lot of vehicle expenses that appear to be unnecessary, that could present a problem. At least one Massachusetts Bankruptcy Judge scrutinizes Chapter 13 Plans for the same issue. He commonly disallows expenses associated with keeping an extra vehicle and instead he adjusts the plan payment to add that money to the plan.
For most Chapter 7 Debtors, this is not really a problem. Many would still have budgets that are “in the red” even if these extra expenses were taken out. In the example I just gave above, the cosigned vehicle would not even appear in the budget, since the true owner of the vehicle is paying the car loan and all of the expenses. In fact, it is very common for there to be an extra car in the house that is technically owned by the parents, but is being used by a child. If the child is paying the gas and insurance, and car loan if there is one, then once again this does not present a budget problem. I do not recall a case that I have had that I had to give up a car to a Chapter 7 Trustee because of equity or where I have had to convert to a Chapter 13 or had a Chapter 13 Plan adjusted because my client had too many cars. I have had a number of people who I have had to turn away, including the person I referenced in the example above, because they have done things such as transfer or pay off vehicles that made the bankruptcy either impossible or impracticable. I always hate when I have to advise a client not to hire me, and not to file bankruptcy. I especially hate it when I am doing this because the person did something entirely unnecessary that they thought would help in the bankruptcy. A good rule of thumb is that if you are doing something simply because you are about to file bankruptcy that you would otherwise not ordinarily do, you are probably doing something wrong and something that is going to cause problems down the road. The better path would be to speak with a lawyer before, rather than after, you do such things.