Car Titles Can Make the Difference in Whether You Keep Your Car or Not in Chapter 7 Bankruptcy

Recently we had a  client who filed for Chapter 7 Bankruptcy to avoid a creditor demanding the client to carry a personal note in excess of $70,000.00 in order to agree to the short sale of a former residence.  After all was explained he chose to go down the path of Chapter 7 bankruptcy in Orlando because it made more sense than to pay over $70,000.00 over the course of 10+ years and have nothing to show for it.  The main issue in his bankruptcy was the fact that he had to buy back the equity in his wife's car.  At the time of the purchase, his wife was not present, so the car was titled in his name.  No financing was used to reduce the equity in the car.  The wife's name was never on the car title, and as such, he was required to buy back the equity from the Trustee with no reduction for the wife's interest even though it was her daily use car.  

In another example of how NOT to purchase or title a car for a loved one, in a recent decision, the United States Bankruptcy Court for the Middle District of Florida, Tampa Division, found that three cars listed in a debtor's bankruptcy petition were not exempt property, and in fact, were the property of the bankruptcy estate such that if the Debtor wished to keep them, she would have had to buy back the equity from the Bankruptcy Trustee.  In that case, the Debtor's father purchased three cars for the debtor's daughters, but titled them in the name of the Debtor with no indication they were titled in the name of the Debtor "as custodian for (name of minor) under the Florida Uniform Transfers to Minors Act."  A such, the Court determined the cars were the property of the debtor, not her daughters, and not her father who bought the cars.

The importance of using "and" or "or" on a title can make the difference when considering Chapter 7 Bankruptcy.  If it is "and" then the equity in the vehicle is 50% one owner and 50% the other owner.  On the other hand, if the term between the names is "or", each owner has 100% interest in the vehicle; and, as such, the equity must be bought back by one owner who has chosen to file Chapter 7 Bankruptcy.

The lesson to be learned:  If you are going to buy a car, boat, motorcycle, etc. for your son, daughter or other family member, and then find yourself needing to file bankruptcy, be prepared to either potentially surrender the vehicle, buy back equity in the vehicle, or better yet, title the vehicle the right way in the beginning and avoid these pitfalls.