The Rules of Purchasing a New Vehicle Prior to Filing Chapter 7 Bankruptcy

Many times we have clients that own an older car with lots of miles or one that is not cost-effective, and they wish to purchase a replacement vehicle.  If they are the kind of clients that we as bankruptcy attorneys love, they will call us before they purchase this vehicle and ask if it is ok for them to do so.  Our initial reaction has always been “of course, go for it as long as you don’t exceed your bankruptcy exemption amount of $4,000 equity per vehicle.”  Recently, I read a judicial opinion that has made me change my tune a little.

There is a 2009 Chapter 7 case out of Tucson in which a Debtor purchased a vehicle prior to filing his bankruptcy.  He could not finance the entire amount of the vehicle himself, so he asked an acquaintance to finance part and record a lien on the vehicle in her name.  The dealership offered to record the lien and sent it to a title agency after her check cleared.  That title agency did not submit the title application until 33 days after the purchase of the vehicle. One day after that, the Debtor’s Chapter 7 bankruptcy was filed.

Ok, so what’s the problem? Well, Arizona law says that to validly create and enforce a lien on a vehicle, the lien must be recorded within 30 days of purchase of the vehicle. Additionally, bankruptcy law states that a Chapter 7 trustee can avoid certain preferential transfers (in this case a transfer of the interest in the vehicle) made 90 days before the filing of the bankruptcy petition.  The exception is the transfer of a security interest, if perfected, or secured, on or before 30 days after purchase of the collateral. So, if the lien on your brand new vehicle has not been properly or timely recorded, the trustee can avoid the “lien” and declare your vehicle owned free and clear.  Once it is free and clear, the trustee can auction any vehicle that is worth more than the bankruptcy exemption amount.  You can bet that if you just purchased a vehicle, it is going to be worth more than $5,000 or $10,000 without a lien.  If you are in this situation, you can bet that your Chapter 7 trustee’s ears will perk up when he or she finds out your purchased a vehicle within 90 of filing your bankruptcy, and then he or she will happily investigate the recording of the title.

So, what was the outcome of this case and what does it mean for all of our clients who are thinking about buying a vehicle before filing bankruptcy?  The docket report in this case shows that the Debtor and trustee ended up settling the issue, so neither clearly won the argument.  In my opinion the trustee settled because the lienholder’s (the generous friend’s) attorney discovered a technicality, in this particular case, that may have barred the trustee from taking the vehicle. It is not something that would exist in every case, and I have seen more and more Chapter 7 trustees asking Debtors if they have purchased a vehicle in 30-90 days before their case was filed.

Therefore, I would caution all potential bankruptcy Debtors to wait to file their bankruptcy until 90 days have passed from the financing of a vehicle, or at least wait 30 days from purchase of a new vehicle (for the lender who waits until the 30th day to record a lien), and to follow-up with the DMV and make sure the lien has been recorded. As always, please be the client we love and notify your attorney of your intent to purchase a vehicle close to the filing of a bankruptcy.