06 Sep Can I Lose My Car if the Bank Screws Up? (Chapter 13)
Last month, we discussed the risk of losing a car in Chapter 7 if the bank fails to properly record their lien. In Chapter 13, the result is often different — and good for the debtor.
If a car lender fails to record its lien properly under your state’s laws, then it won’t have a “secured” claim in Chapter 13. But the trustee in Chapter 13 is typically not in the business of taking the estate property and selling it to pay creditors. Instead, he takes payments from the debtor.
The fact that there is no debt on the car could require you to pay more to your creditors, based on the liquidation test in Chapter 13. This test requires you to repay unsecured creditors as much as they would be paid if you had filed Chapter 7. So if a hypothetical Chapter 7 trustee could have paid $10,000 to creditors from the proceeds of the car, you will need to pay at least $10,000 over time through Chapter 13 in order to keep the car.
If you had owed $10,000 on the car already and would have had to pay that outside the bankruptcy to keep it, what good is accomplished? Well for starters, your car loan had interest to be paid over time, the Chapter 13 unsecured debts are normally paid without interest. If the car loan was a high interest loan, this could be several thousand dollars of savings all by itself. And if you owed more than the liquidation value of the car, you probably save even more money.
And the car lender is out of luck after the case discharges. Without a lien, they are simply an unsecured creditor wiped out at the end with all the other debt.
Sometimes the bank does put a lien on the car properly but they do it late. If the bank does it within the 90-days before you file a Chapter 13 — but more than 30-days after you took out the loan — then the lien is valid but avoidable under a 1998 Supreme Court case, Fidelity Financial Services, Inc. v. Fink, brought by the Chapter 13 Trustee in Western Missouri.
In most courts only the trustee has the power to avoid such liens. And they typically have only two-years from the start of the case to do it. So this is why bankruptcy trustees will often want to see copies of the loan paperwork and lien records on cars. And it is one of those situations where you may save money in the long run if the trustee can knock out a lien on your car.
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