Why Car Insurance Is Required When Filing For Bankruptcy.

20 Jul Why Car Insurance Is Required When Filing For Bankruptcy.


“Mrs. Smith, please hand your car keys over to your attorney.  You are not allowed to drive that vehicle until you provide me evidence of insurance.  I suggest you take the bus home and make arrangements immediately to protect and store that vehicle.”  Such a statement might come from a Bankruptcy Trustee at the Trustee hearing.  Why?


Once a Bankruptcy Case is filed, a “Bankruptcy Estate” is created.  The vehicle is part of this estate.  Even if it is totally claimed exempt and will not be sold or administered by the Bankruptcy Trustee, it does raise liability concerns.  Technically, if the vehicle was involved in an accident with the debtor at fault, not only could the debtor be sued for a post petition debt, but the Bankruptcy Estate may be liable as well, and if there are assets that are not claimed exempt, such a claim may diminish the dividends creditors might have otherwise received from such assets..


For example, suppose that the Trustee is liquidating a piece of real estate in a Chapter 7 case that will net $50,000 to the estate and the debtor is faulted for an auto accident post petition.  The damaged party might not only assert a claim against the debtor(which would not be dischargeable since it occurred after the bankruptcy was filed) but also against the Chapter 7 estate.  The $50,000 originally earmarked for distribution to creditors is now compromised by the auto accident claim.  Had the trustee required that insurance be maintained on the vehicle or that it not be driven until such time insurance is available, the $50,000.00 would still have been protected.  This then brings up trustee liability and the trustee may now be sued.


So there is a legitimate reason that the trustee might require that your vehicle be insured, even though it is fully paid for.  The same goes for home insurance, motorcycle insurance, sole proprietorship personal liability insurance, etc.


Written by Michael G. Doan


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