Bankruptcy and Family Car Loans

I was asked today to address a very common mistake people make before filing bankruptcy. The prospective debtor borrowed money from his parents to buy a car. The car was titled in the debtor’s name. The debtor signed a promissory note for the amount of the loan made payable to his parents, but the parents did not record a lien on the car title. Now the debtor is considering bankruptcy, and he wants to know how the legal status of his debt to his parents for the car. He also asks whether his parents should put a lien on the car title before he files bankruptcy.

This is not a good situation for either the debtor or his parents in bankruptcy. The car loan from his parents is unsecured. The debtor may pay his parents back if he wants to, but technically, the parents cannot ask for repayment after the bankruptcy is filed. The car is unencumbered, and if there is equity in the car, the trustee will demand payment for the equity over the $1,000 Florida car exemption. Also, as the car loan is not a secured debt, monthly payments to his parents will not count a secured debt in the debtor’s means test calculations which will make it more difficult for the debtor to qualify for Chapter 7 bankruptcy. If the debtor sells the car and purchases a new car subject to a car lien he still may be liable to the trustee for the excess equity he received from the loan and reinvests in a new car.

The lesson is that if you borrow money from a family member to buy a car, house, or any other item, make sure you document the loan the same way a bank would. If it’s a house, have the family member record a mortgage; in the case of a car, put the family member as a lienholder on the title. This protects both you and your family member if you later have creditor problems.

posted by Jonathan Alper, bankruptcy and asset protection lawyer, Orlando, Florida

Comments

[car loan]

i found this site really good which gives ideas on how to handle problems like the scenario above. it really help.

[Used Cars]

Yeah, these are those situations that can haunt those in bankruptcy.

[Heather]

A relative of mine took out a home equity loan to pay for a parcel of land for me. I pay him $600 per month, which is the minimum payment on the loan through Bank of America, in his name.

If I file Chapter 7 would the trustee look to him for that money since he is considered an "insider" even though the money is going to pay off the loan, and not into his pocket?

[Bankruptcy Car Loans]

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[Eugenio Bueno]

Jonathan,
My situation is similar to mentioned above, but slightly different. I purchased a new car on my own without any money from a family member and financed it with a bank. Several months later my mom gave me the full amount I owed on the loan. She did this to in essence transfer the loan to her. I reduced my interest rate and lowered my monthly payment (for same duration as the bank loan). She benefits by making higher interest dividends than a CD would pay her. I did not file a lien at that time. I may be filing chapter 7 within a year or so. I have all the documentation showing my monthly checks to my mom for my car loan payment. If I file a lien now do I have any chance to avoid the car being taken away at a later date if I file for bankruptcy?

[Karen Peterson]

Does anyone know how "reverse mortgages" are handled in Fla. My mom is 80 and has credit card debts, little income and no money in the bank. She wants to stay in her little condo, which has no value anymore. All she has is that reverse mtg so she doesn't have to pay the mtg payment. Is her house still protected like "HOmestead" or is it different when its a reverse mtg?

[Sandy]

My husband & I are considering Chapter 7 bankruptcy. We have two automobiles worth approx$1,200 each. The exemption for couples is $2,000. Is this $1,000 for each vehicle or can you only use the exemption on one vehicle only?

[car loan las vegas]

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[Paul]

What Florida statutes are involved when a private person--not an insider--loans money for a pre-bankruptcy debtor to buy a car, then waits a few months before placing a lien on the title through the DMV? Does the chapter 7 trustee get to avoid the lien?

[Jonathan Ginsberg]

Jonathan - in addition to your astute observations about the danger of not treating this car purchase with the formalities of an arm's length purchase, I would also point out that the trustee might object to the recent purchase if the debtor files within two or three months of buying the vehicle. Here in Atlanta, the Chapter 7 trustees routinely ask if the debtor has made any major purchases within the last 6 months - presumably a major purchase (especially from a family member) could be seen as an improper income suppression scheme or even a fraudulent transfer.
Jonathan Ginsberg