Can I Lose My Car if the Bank Screws Up?

01 Aug Can I Lose My Car if the Bank Screws Up?

Financing a car means you agree to give the bank a lien on the car to secure payment. It is sometimes important to be sure the bank filed its lien in the right way in your state if you want to keep the car in bankruptcy.

Assuming you are keeping up on the payments, you are willing to reaffirm the debt and you can exempt any equity you have in the car, it is usually a simple matter to keep your car through a bankruptcy. But, in rare circumstances, you may have to count on the creditor doing its job properly protecting its right to protect your own.

It may seem odd to think you have to count on your lender to be sure you keep a car. However in rare cases a car lender has recorded the lien against the car — the one you agreed to in buying it or borrowing against it — until just before the bankruptcy is filed. You may not be aware of this. But if it happens during the 90-days prior to filing the case (and more than 30-days after you made the loan), then the lien you granted on the car could be avoided by the trustee.

How? When you agree to a lien on your car to secure a loan, you are giving away an interest in your property. That is a transfer just like if you signed the title over to someone. It is technically voluntary on your part. And a trustee may be in a position to set aside the lien placed on the car and free up equity in the car. And, as the Tenth Circuit Court of Appeals recently decided, you cannot protect that equity from your creditors. In some places, the trustees would be treated as “stepping into the shoes” of the creditor who held that lien and you would make payments to the trustee just like the bank. In others, the Chapter 7 trustee would simply take the car and sell it to pay unsecured creditors. (In Chapter 13 cases, the amount you would have to repay creditors might change but you would not necessarily lose the car. We will address this scenario in the future.)

So it isn’t because (or not only because) your lawyer is an anal retentive jerk that he wants to see details about when you bought a car, from whom, to give him copies of the contracts, car title and/or lien records and so on. He may be making sure there’s no risk here. Most often there isn’t. Banks and car lenders have become very good at filing their liens properly. And even if there is a problem, it can often be cured before a case is actually filed. But it pays to be careful.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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