I want to file a Chapter 7 bankruptcy, but I have a car titled in my name that is used by my daughter who is in college. The car was titled in my name because she did not have the credit to get the car loan on her own. Will I lose the car in the Chapter 7 bankruptcy, even though it really belongs to my daughter?
Just because the car is in your name does not automatically mean it will be taken by the bankruptcy trustee. If a court determines that the car is "equitably owned" by your daughter, she will be able to keep the car, even though you are the one with legal title to the car.
When Does the Trustee Take Property in Chapter 7 Bankruptcy?
Once you file your bankruptcy, a bankruptcy trustee will be appointed to your case. The trustee will evaluate your property, and take any property or assets which you own and which are not protected by exemptions. (To learn more about how Chapter 7 bankruptcy works, including the role of exemptions, see Chapter 7 Bankruptcy: An Overview.)
Equitable vs Legal Title to Property in Bankruptcy
When it comes to ownership of property, however, bankruptcy law recognizes a difference between equitable and legal title.
What Is Legal Title?
Legal title means that you are recognized, by a document or in a public record, as the owner of property. For example, having your name on a deed for real property, on the title of a vehicle, or on a bank account, makes you the legal owner of that property.
What Is Equitable Title?
There are many circumstances where the person who has legal title does not in “real life” own the property. For example, you may have legal title, but a family member, spouse, or employer may, on a day-to-day basis, actually have control and possession of the property. If a person owns, uses, and possesses property that is not legally titled in his or her name, that person has equitable title to the property.
The Trustee Cannot Take Property if Someone Else Is the Equitable Owner
If someone other than the debtor has equitable ownership of property, the trustee cannot take that person’s equitable ownership interest away. This makes the property generally safe from seizure by the trustee.
Common Situations When a Debtor is Not the Equitable Owner of Property
There are many situations where a debtor may have legal title to property, but not actually use, own possess, or maintain it. Some common situations are:
- a parent whose name is on the title to a vehicle that really belongs to or is used by a child
- a spouse on title of a car that is used by the other spouse
- a spouse on title to property that is used and owned by the other spouse because of a divorce or other court decree
- a person who is put on the title to property in order to assist an elderly relative who uses the property but does not have the capacity to manage it, or
- a person who is the legal owner of a motor vehicle at the request of an employer, but where the employer actually has control or possession of the vehicle.
Debtors may be very concerned over losing property in any of these situations. However, because bankruptcy law recognizes the difference between legal title and equitable title, the trustee is unlikely to take property that is equitably owned by another.
Factors the Trustee Will Consider in Determining if Someone Has an Equitable Interest
In the case of a car, it is not enough that a family member simply drives it to have an equitable interest. The trustee will usually ask certain questions and look at certain facts, to determine whether property is equitably owned by someone other than the debtor. These questions may include:
- Where is the car routinely housed or garaged?
- Who makes the car payments on the vehicle and what address do billing statements go to?
- Who pays for repairs or maintenance on the vehicle?
- Does the debtor with legal title have the right to use the car whenever needed, or would permission from the equitable owner be needed?
- Is there a contract or document which provides for the equitable interest, such as a divorce decree or trust agreement?
- How long before the filing of the bankruptcy has the car been owned or possessed by the equitable owner?
The more your daughter has control over and spends money and time on the car, the more likely that the trustee will find that she has an equitable interest in the vehicle.
Practical Considerations if You Have Legal Title Only to Property
Although property equitably owned by another person is generally safe from seizure by the trustee, be ready for a longer process before your discharge is entered if you are in this situation.
The trustee may want proof of the other person’s equitable ownership, and in some cases may question the other person about usage, payment for, and possession of the car. The trustee may even file an adversarial action to determine whether you have bare legal title, or both legal and equitable title.
Although this does not happen in every case, and although the property may eventually be found to belong to someone other than you, the potential fight is an issue to be aware of should you file for bankruptcy with a car that is in your name but actually owned by someone else.
What If the Trustee Finds That You Do Have Equitable Ownership?
If the trustee ultimately determines, based on the individual facts of the situation, that you do hold both legal and equitable title, you may still be able to keep the car. For more information, see Your Car in Chapter 7 Bankruptcy: an Overview of Your Options.