BANKRUPTCY PITFALL: BUYING A CAR BEFORE BANKRUPTCY
As a general rule of thumb, it is not a good idea to transfer assets or make big purchases right before you file for bankruptcy. However, sometimes a person facing bankruptcy has no choice but to purchase a vehicle right before filing. Remember, in a bankruptcy the statute allows different exemptions for things like home equity and vehicles: the idea is not to throw you out on the street with nothing but a can of Spam and your Kool & the Gang records, but to give you a fresh start. So, if you pay for the car with cash, you will need to ensure that the value of the vehicle is covered by available exemptions - or you could risk losing the vehicle to the trustee or paying the trustee money to cover the non-exempt value of new vehicle. And that would be bad.
If you are financing the purchase of a vehicle right before filing, you could run into some problems. When a vehicle is purchased with a loan the lender needs to file paperwork with the state within 30 days of the purchase in order to secure its lien in the vehicle. This is called “perfecting” the lien. The lender’s security interest is not perfected unless and until this is done. If you then file for bankruptcy before the lender’s security interest is perfected, the lender becomes a general unsecured creditor, which is also bad, and here’s why.
The trustee is allowed to avoid or undo payments of $600 or more that you make to any one unsecured creditor during the 90 days before filing. Since the lender was a general unsecured creditor up until the time the lien was perfected (hopefully prior to 30 days after purchase of the vehicle), it means the trustee can void all funds given to the lender, including any down-payment, so long as the total amount transferred to the lender is more than $600. So, if your lender is a general unsecured creditor, all the money you paid to your lender is now voided, and you still owe it. In this Bizzaro world scenario, you will emerge from bankruptcy finding yourself in significant debt to the lender for payments you already made. Yikes. You will either have to surrender the car or pay back to the lender all the money the trustee took - and what’s worse than that? Not much.
If you file for bankruptcy prior to the lender perfecting its interest, you will be deemed to own the vehicle free and clear. Just as if you had purchased the vehicle with cash, in this situation the trustee could actually seize the vehicle if there is not enough exemptions available to cover the value of the vehicle. And then you’re riding your Schwinn to work. In the rain.
If you just have to finance the purchase of a vehicle before filing, you will want to make sure the lender has perfected its lien within 30 days after the purchase of the vehicle and you will then want to wait 90 days to file - unless your payments are tiny and the lender would be receiving less than $600 during the 90 days before filing.
Sound like a big complicated mess? It is. It’s only one of the issues that can trip you up in the maze that is the bankruptcy statute. Don’t try to figure this stuff out on your own. If you are facing a bankruptcy, give us a call!