Can a Jointly Owned Car be Seized in Chapter 7 Bankruptcy?

Learn the difference between legal and equitable ownership of a car, and how that affects whether you lose it in bankruptcy.

By , Attorney

Question

I want to file a Chapter 7 bankruptcy, but my daughter's car is in my name, and I'm worried I'll lose it. I'm on the title because she didn't have sufficient credit to get the car loan on her own. Will I lose the car in the Chapter 7 bankruptcy even though it belongs to her?

Answer

Just because the car is in your name doesn't automatically mean the bankruptcy trustee will take it. If a court determines your daughter "equitably" or actually owns the car, she'll keep it, even though you have legal title.

But, there's a catch. You'll have to prove your daughter owns the car, which can be a tricky business. If you can't prove it, you might not want to file for Chapter 7 bankruptcy unless you can, or are willing, to do one of three things:

  • protect the vehicle equity with a bankruptcy exemption
  • pay the trustee for the vehicle equity, or
  • be willing to give up the vehicle.

We explain these outcomes and the Chapter 7 process below, but because your case is unique, consider speaking with a local bankruptcy lawyer. A bankruptcy attorney would review your case and predict the chances of keeping your daughter's car, identify potential hurdles, and evaluate whether you'd benefit from Chapter 7 even if you lost the car.

Will I Lose My Daughter's Car in Chapter 7 Bankruptcy?

Possibly. It will depend on several factors, the first of which is whether you own the property.

The Chapter 7 trustee is the person the court assigns to inspect your bankruptcy paperwork for nonexempt property and take any you can't protect with a bankruptcy exemption. The trustee will find out you're on the title of your daughter's car by checking your Statement of Financial Affairs for Individuals Filing for Bankruptcy or "SOFA" form. That's where you list any property you're holding for someone else.

Usually, the trustee won't have any problem determining who owns the listed property. But sometimes, such as in your case, it might not be clear.

How Will the Trustee Determine Who Owns Property in Chapter 7 Bankruptcy?

The trustee will know you have "legal title" to the vehicle because you're on title, a public document. Vehicle title establishes legal ownership of a car just as a real estate deed or bank account would establish the legal owner of real estate or a bank account.

But sometimes, when someone has legal title, another person, such as a family member or spouse with day-to-day control of the property, has "equitable ownership."

Generally, a person without legal title who owns, uses, and possesses property has equitable property title (but sometimes written documentation establishing ownership is mandatory, so talk with a lawyer). In this case, you would likely argue that your daughter has equitable vehicle ownership

When a Trustee Will Recognize an Equitable Property Owner

If someone other than the debtor has equitable property ownership, the trustee can't take that person's equitable ownership interest away. Some situations where a debtor might have legal title but not use, own, possess, or maintain the property include when:

  • a vehicle belongs to or is operated by a child or spouse
  • the property is owned by a spouse equitably due to divorce or another court decree, or
  • an elderly relative doesn't have the capacity to manage the property.

Although the examples would seem to make equitably owned property safe from seizure by the trustee, the safety of the property will depend on whether you can prove equitable ownership exists.

Factors the Trustee Will Consider When Determining If Someone Has an Equitable Interest

It's common for family members to drive each other's cars without owning them, so the fact that your daughter drives the vehicle won't be enough to establish an equitable interest. Count on the trustee to examine additional facts by asking questions such as:

  • Where is the car usually parked or garaged?
  • Who makes the car payment, and what address does the billing statement go to?
  • Who pays for repairs and vehicle maintenance?
  • Can the debtor with legal title use the car when needed, or is permission from the equitable owner necessary?
  • Does a contract or document provide for equitable interest, such as a divorce decree or trust agreement?
  • How long before the bankruptcy filing did the equitable owner possess the car?

The more your daughter controls the car by spending time and money on it, the more likely the trustee will find she has an equitable interest in it.

What to Expect When You Jointly Own Property in Bankruptcy

Although property equitably owned by another person is technically safe from seizure, this isn't an ideal situation when filing for bankruptcy because the outcome isn't guaranteed.

The trustee will want proof of the other person's equitable ownership and could question the validity of your claim. The trustee could even file an adversarial action and ask a bankruptcy judge to determine whether the property belongs to the filer or someone else.

If ownership isn't clear and you can exempt the property using a bankruptcy exemption—the laws that allow you to keep an asset in Chapter 7—it's often easier to claim the property as your own and protect it with an exemption. More about protecting property with exemptions follows.

What If the Trustee Finds You Fully Own the Car?

If the trustee determines that you hold both legal and equitable title, you'll have to protect it in Chapter 7 bankruptcy if you're to keep it. You find out what you can retain by reviewing your state's bankruptcy exemptions or the federal bankruptcy exemptions if your state allows it.

Here's how exemptions will affect the car in Chapter 7 bankruptcy:

  • If you can protect the equity car with a bankruptcy exemption, you'll keep it in Chapter 7.
  • If you can't cover the car's equity with a bankruptcy exemption, the trustee will seize it and sell it for the benefit of creditors.

Many trustees will let you buy unprotected equity at a slight discount by considering sales costs and fees. If you do, you'll keep the car, and you might even get a few months to find the money.

You'll find links to state exemptions halfway through this bankruptcy exemption article.

What If the Trustee Finds You Own a Car With Someone Else?

Complicated situations surrounding cars and bankruptcy abound. The trustee might decide you own two cars—your daughter's car and your own. Or, the trustee might decide you and your daughter own her car together.

The trustee will know how to handle the situation because they regularly arise, for instance, when spouses own multiple cars and file separately. The trustee will determine who owns the vehicle and whether a bankruptcy exemption protects the filer's ownership interest.

If money would remain for creditors, the trustee will sell the nonexempt property and return the following: any portion owned by someone who doesn't file for bankruptcy and the amount the filer can exempt.

Example. Rose and Jonathan, an unmarried couple, own an unfinanced car worth $30,000. Jonathan files for bankruptcy and can protect $5,000 of motor vehicle equity, leaving $10,000 of his equity unprotected. The trustee would likely sell the car, return Rose's $15,000, give Jonathon the $5,000 exemption amount, and distribute the remaining $10,000 to creditors after deducting sales costs and the trustee's fees.

Although the "trustee keeps any nonexempt portion owned by the filer" rule is straightforward, we've oversimplified it for this article. Community property rules, liens, and auto financing issues could further complicate your case, so be sure to talk with a bankruptcy lawyer.

Why You Should Meet With a Local Bankruptcy Lawyer

Bankruptcy issues that seem straightforward can have both pitfalls and beneficial angles to explore. A bankruptcy attorney can evaluate your facts and explain the various strategies available. Even more importantly, bankruptcy lawyers often resolve issues with the bankruptcy trustee so you don't have to.

Here are a few things you might discuss with your attorney in this particular situation.

If you can't keep the car, sometimes the debt relief afforded in Chapter 7 far outstrips the value of the property lost. The lawyer can help you find out by adding the debt you'd erase and subtracting the value of the property you'd lose. Learn about nondischargeable debt in bankruptcy.

But that's not the only way you could come out ahead. When you owe priority debts that aren't "discharged" or erased in bankruptcy, like domestic support or recently-incurred tax debt, losing property isn't as much of a loss. Any funds the trustee recovers from selling your property will be paid toward priority debts first, and in many cases, you'll owe less on those obligations when your case ends.

Also, if you want to keep a car you'd otherwise lose, the trustee will likely let you pay for the equity you can't cover with an exemption. And most will give you a discount, for example, a 20% reduction in sales costs and fees. You could even get a few months to pay.

Find out more about keeping cars in bankruptcy.

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