As a bankruptcy lawyer, I have to deal with the consequence of what I call “real world” activities. In the non-bankruptcy world people make decisions that will save money and make life easier. For example, blog reader Lou writes me with a question about car titles:
I might need to file chapter 13 in the future. I filed a Chapter 7 in 2003 and now have a lot of credit card debt. I have a house but I do not want to keep it. When the house goes into foreclosure the only property I will have in my name is 3 cars valued from $6000 to $8000 each. I only own one of them. The other two belong to my parents. I got loans in my name for the cars because I got the best rates, but when they were paid off I never signed the titles over to my parents. In a ch. 13 will all the cars be considered mine, or is there a way to prove that they belong to my parents? My name is the only name on the titles.
It appears to me that Lou and his parents made a common sense decision at a time when bankruptcy was not a consideration. Lou most likely qualified for better rates because he was working so he made a decision to help out his parents by applying for car loans in his name. His parents have made all the payments so as far as they and Lou are concerned the cars belong to the parents.
Unfortunately this is not how the bankruptcy court will look at things. If the title to the vehicle shows Lou’s name only, all three cars belong to him. If he files a Chapter 13 in Georgia, he can exempt up to $3,500 in vehicle equity but that is it. Lou’s Chapter 13 will have to account for any non-exempt equity, as follows:
Let’s assume that all three vehicles are paid for and that each are worth $7,000. That would be $21,000 of equity in vehicles. In Georgia, Lou could exempt $3,500 of equity, leaving $17,500 of non-exempt equity. Lou can also use half of his real estate exemption to shelter the vehicles. In Georgia, the real estate exemption is $10,000, which means that Lou can use $5,000 of exemption and apply to the vehicles. $17,500 – $5,000 = $12,500. Georgia law also provides for a wild card exemption of $400 that applies to any property – I typically use that for cash and checking accounts so let’s leave that out of the mix. For our example, Lou has $12,500 of “non-exempt” equity.
If Lou was able to qualify for Chapter 7, the trustee would have the right to sell the vehicles to liquidate $12,500, which would be used to pay claims of the Chapter 7 estate. $12,500 is 25% of $50,000. In a Chapter 13, therefore, Lou would have to pay back at least 25% of his unsecured debt.
Note that for purposes of this analysis, I did not address any means test problems which might arise from Lou’s household income. Additionally, I think that Lou could face an objection from the Chapter 13 trustee regarding his need for three vehicles. If Lou’s parents are not dependent upon him, the trustee might take the position that three vehicles are not essential for Lou’s financial rehabilitation. As far as the trustee is concerned, the rights of Lou’s creditors may trump the needs of Lou’s parents. In other words, should Lou’s creditors have to deal with the risk inherent in Lou being on the hook for two vehicles he does not drive? In my experience, the Chapter 13 trustee would object to Lou keeping all three vehicles – his solution would be to pay a higher dividend (i.e. more than 25%) to the unsecured creditors.
As you can see, a simple question arising from a non-bankruptcy decision can have all kinds of bankruptcy implications.