Debtor's Decision To Surrender Car Was A $1,000 Mistake

A bankruptcy client owned a car with a small car loan. The client had thousands of dollars of equity in a car and stated on his bankruptcy petition that he wanted to reaffirm the loan and keep the car. I explained to the client that he would have to pay the bankruptcy trustee the amount of non-exempt car equity. This client's car exemption was $1,000 and the car equity was at least $5,000. After filing bankruptcy the client decided that he could not afford to both pay the trustee and pay future car payments because his salary had been decreased after filing. So, he called the car lender and surrendered the vehicle. The lender sold the car at auction for the loan value.

The client explained the car history to the Chapter 7 Trustee at the meeting of creditors. The Trustee told the client that he was not supposed to transfer or surrender an asset with equity. If the client had kept the car until the Trustee meeting (even if the client missed a payment) the Trustee would have sold the car and given the client $1,000 of exempt car equity from the sale proceeds. The client’s impulsive decision to turnover the car to the lender cost himself $1,000 and was technically a violation of the bankruptcy stay. The Trustee indicated he would take no action against the client who appeared to have acted without bad intent.

I understand, and I believe the Trustee agreed, that this bankruptcy debtor made a hasty decision because he was under financial stress. Still, if you change your mind about keeping or surrender assets with equity you should first consult with your bankruptcy attorney before implementing your decision.

Comments

[Alex]

If the trustee liquidates a car with equity and a loan, do we get the $1,000 exemption paid to us? We had no other car, she took them both. She claimed higher equity than the value...

[Bankruptcy]

That is benevolent of the trustee to not take action against the client, even though technically they could have because the client had sold an asset with equity (sort of redundant to say asset w/ equity - but wth).