Can I Put a Lien on My Car to Save It From Bankruptcy?

Plan ahead to protect your car from loss in bankruptcy.

When you file for Chapter 7 bankruptcy you give permission for the bankruptcy trustee to sell all of your nonexempt property. In an attempt to avoid the trustee selling off your car, it may be strategic to take out a loan secured by a lien on your car to reduce your equity in the car. If you reduce the equity to an amount that is lower than the applicable exemption then your car will not be exposed to liquidation by the trustee. This strategy works in some situations, but it does not work in others.

Time Frame

Certain circumstances when taking out a lien on your car are guaranteed to get you in trouble. A bankruptcy court may find you guilty of fraud if you grant a lien on an existing obligation solely for the purpose of bankruptcy planning. For that reason, you should never grant a lien on a car if you are not simultaneously receiving new money in exchange for the lien.

New Money

A new loan with new money changing hands is much less likely to be viewed as fraud by the bankruptcy court. Just be sure that you actually receive money from the person or company taking out a lien on your car. If no money changes hands, the the transaction is likely to be undone by the bankruptcy court, and the court could dismiss your case on the basis of fraud. Some bankruptcy courts have local rules that dictate whether pre-bankruptcy planning, like granting car liens, constitutes fraud, so you should check with a local attorney or review the local rules yourself.

Personal Transactions

You should also beware making transactions with a family member, friend, business partner or company in which you are an officer or have an ownership interest before you file for bankruptcy. The bankruptcy court can generally look back on these types of transactions for up to a full year before you file bankruptcy. The court will likely unwind any preferential transfers to these closely related individuals and entities. If you grant your brother a lien on your car six months before you file bankruptcy then the bankruptcy court is likely to discharge that lien and also may discharge your bankruptcy case for fraud.

Warning

Although it may be tempting to take out a lien to avoid the loss of your car, you should also consider the flip side of the equation. An obligation secured by a lien on your car will not be discharged in bankruptcy, while other obligations probably will be discharged. For example, if you take out a new loan secured by a lien on your car and use the money to pay down your credit card debt, then you really haven't gained much. You have simply protected non-exempt property at the expense of paying off debt that would otherwise be discharged. If you take out a new loan, it is therefore best to use the proceeds to purchase property you know will be protected by an exemption.

References

• "The New Bankruptcy: Will It Work For You?"; Stephen Elias; 2009