Will Chapter 7 Bankruptcy Take a Car in My Name That Someone Else Owns?

A Chapter 7 trustee can sell a car titled in your name, even if someone else drives it, unless you can prove that person is its true, or “equitable,” owner. If you can’t prove it, you can protect the vehicle equity with a bankruptcy exemption, pay the trustee for the equity, or give up the car. This article explains how the trustee decides who owns the car and what each outcome means for you. You can also read more about jointly owned property and the Chapter 7 process.

Will I Lose My Child’s or Spouse’s Car in Chapter 7 Bankruptcy?

Possibly. It depends on several factors, starting with whether you own the car. When you file your bankruptcy paperwork, you must declare everything you own. The bankruptcy trustee who reviews your paperwork will look for nonexempt property, which is property you can't keep in bankruptcy. (11 U.S.C. § 704(a)(1).)

Usually, the trustee won’t have any problem determining who owns a car. But sometimes, such as when you’re the titleholder for a vehicle someone else possesses, it might not be clear. A good practice is to clearly explain the situation in the bankruptcy paperwork and be prepared to support it with proof.

How the Trustee Decides Who Owns the Car

The trustee looks at both legal title and equitable ownership, and the person with equitable ownership can keep the car even if someone else is on the title. Here’s a quick look at the four most common situations:

Legal Title vs. Equitable Ownership

Legal title is ownership on paper, while equitable ownership belongs to the person who actually owns, uses, and possesses the property. The trustee will know you have legal title to the vehicle because you’re on the title, a public document. A vehicle title establishes legal ownership of a car, just as a deed does for real estate.

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 title (but sometimes written documentation establishing ownership is mandatory, so talk with a lawyer). In this case, you would likely argue that the person who has the car has an equitable interest in the vehicle. (11 U.S.C. § 541(d).)

Factors the Trustee Will Consider

Driving the car isn’t enough to create an equitable interest, so the trustee will look at who controls it and pays for it. Family members often drive each other’s cars without owning them. 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 control the person who has the car exercises by spending time and money on it, the more likely the trustee will find an equitable interest.

When a Trustee Will Recognize an Equitable Owner

If someone other than the debtor has equitable ownership, the trustee can’t take that person’s interest. 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 these examples might make equitably owned property safe from seizure by the trustee, the property’s safety depends on whether you can prove equitable ownership.

What to Expect When Someone Else Equitably Owns Your Car

Property equitably owned by another person is technically safe from seizure, but relying on that protection is risky 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 adversary proceeding 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.

What If the Trustee Finds You Fully Own the Car?

If the trustee determines you hold both legal and equitable title, you’ll keep the car only if you can protect it in Chapter 7 bankruptcy. You can find out what you can retain by reviewing your state’s bankruptcy exemptions (or the federal exemptions, if your state allows them). (11 U.S.C. § 522.)

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

• If you can protect the equity in the 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 discount that reflects the sales costs and fees they’d avoid. If you do, you’ll keep the car, and you might even get a few months to find the money. Learn more about keeping a car in bankruptcy using the motor vehicle exemption.

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

If the trustee decides you and the person who has the vehicle own it together, the trustee can sell it, pay the co-owner their share, and apply any exemption to yours. The trustee might also decide you own two cars, and depending on your state’s exemptions, you might not be able to protect both.

The trustee will know how to handle the situation because these issues 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 remains for creditors, the trustee will sell the nonexempt property and return any portion owned by someone who doesn’t file for bankruptcy, as well as the amount the filer can exempt. (11 U.S.C. § 363(h).)

Example. Rose and Jonathan, an unmarried couple, equally 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 $15,000 share unprotected. The trustee would likely sell the car, return Rose’s $15,000, give Jonathan 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 you’ll want to talk with a bankruptcy lawyer.

How Priority Debts Can Make Losing Property Hurt Less

Losing nonexempt property hurts less when you owe priority debts that aren’t “discharged” or erased in bankruptcy, like domestic support or recently incurred tax debt. The trustee will pay any funds recovered from selling your property toward priority debts first, and in many cases, you’ll owe less on those obligations when your case ends.

Next Steps: Talk to a Bankruptcy Lawyer

Because the outcome depends on facts the trustee will question, meet with a local bankruptcy lawyer before you file for an evaluation and to learn the strategies available. Even more importantly, bankruptcy lawyers often resolve issues with the bankruptcy trustee so you don’t have to. If you want to keep researching before that meeting, these related articles can help:

• find out more about keeping cars in bankruptcy
• see how the Chapter 7 means test could affect your eligibility, and
• learn more about what happens to your property in bankruptcy.