What Happens When Debtor Buys A Car For His Child

Many young adults need their parents’ help to purchase their first car. Sometimes the parent puts the car in their own name in order to get lower insurance premiums or better loan rates. Typically, the child drives the car, makes the car payments, and pays for gas and repairs. When the parents decide to file bankruptcy they describe the car as their child’s car. Most bankruptcy trustees will argue that the car is the parents property and that any equity in the car becomes part of the bankruptcy estate. Parents will have to pay the bankruptcy trustee the amount of non-exempt equity in the car they intended to purchase for their child. Parents wanted to purchase a car for a child over 18 years of age should put the car in the child’s name.

Debtors who own "their child’s car" in this type of situation have a possible defense against a bankruptcy trustee’s efforts to bring the car equity into the bankruptcy estate. The parents could assert an argument that they hold legal title in trust for, or as a nominee for the child. The child has all equitable interest in the car. This argument could be effective where the child has paid his own money for all car expenses and where the child controls the use of the car.

posted by Jonathan Alper, bankruptcy and estate planning attorney, Orlando, Florida