It is not uncommon for a debtor in bankruptcy to hold title to a car or other vehicle in the possession of and used by someone else.
Often, a car has been purchased by the debtor for a friend or family member because they cannot obtain the necessary financing credit, have a suspended license, or for other such reason. The Detroit area is not an area in which it is easy to get from place to place without a car—so help owning one is sometimes needed.
Notwithstanding the criminal legal issues involved with someone driving a car on a suspended license, what’s wrong with helping a friend or family member out with their transportation needs?
From a bankruptcy perspective, this is a problem. It is particularly a problem in Chapter 7 bankruptcy.
ASSET PROTECTION IN MICHIGAN CHAPTER 7 BANKRUPTCY
This is an issue in Chapter 7 bankruptcy because, in a Chapter 7, the assets of the debtor are subject to being seized and sold off so that creditors might be repaid at least in part. The individual who conducts this asset liquidation is called the Chapter 7 Trustee.
In order to protect assets in Chapter 7 bankruptcy, they must be properly and fully exempted in a debtor’s filed bankruptcy petition.
The process of protecting assets with the appropriate exemptions has been discussed elsewhere on this blog, most recently here.
Long story short, however, if an asset is not fully exempted, the Chapter 7 Trustee may seize it and sell it.
The Chapter 7 Trustee also has the power to “avoid” (unwind or undo) transfers of cash or property that have occurred within as many as 6 years prior to the filing of the bankruptcy case under certain circumstances.
This is particularly true if the transfer was made to repay a debt to a creditor in an amount over $600.00 or if the property or cash was transferred fraudulently. It is important to note that, under the Bankruptcy Code, “fraud” does not require that the debtor intended to defraud anybody, only that a transfer occurred within a certain time frame prior to filing and that the property was transferred for less value than it was worth.
MICHIGAN BANKRUPTCY AND THE CONCEPTS OF BARE LEGAL TITLE AND EQUITABLE INTEREST
Where does this leave a vehicle titled to the debtor but possessed, driven, paid for, and maintained by someone else?
In particular, where does this leave such a vehicle when it is entirely paid for and no longer has any lien on its title?
Historically, a debtor with the need to file a Chapter 7 bankruptcy whose name sits on the title to “someone else’s” car could find some defense in a legal concept called Bare Legal Title.
A debtor driving a car titled to someone else would likewise need to disclose and exempt that interest under the theory that they own an “equitable” interest in the vehicle, regardless of the fact that his or her name may not be on the title (“legal interest”).
This post will not discuss equitable interest in great detail, except to the extent that it runs in tandem with a discussion of Bare Legal Title in Michigan.
The U.S. Bankruptcy Code, which is the Federal law governing the bankruptcy process, describes in detail which property interests fall into what is called the Bankruptcy Estate upon the filing of the Chapter 7 or Chapter 13 case. (The Chapter 7 Trustee may only liquidate the assets within the Bankruptcy Estate.)
The Code states that property in which the debtor holds only a legal but not an equitable interest becomes property of the Bankruptcy Estate upon filing only to the extent of any equitable interest in the property that the debtor personally holds.
The value, then, of an “equitable” interest in a vehicle in which the debtor has not sunk a dime of his or her own money is theoretically zero.
Waving this Bare Legal Title concept in the air, many Chapter 7 bankruptcy cases have been filed in the Eastern District of Michigan with vehicles titled to but not equitably owned by the debtors filing the case. It has historically been a good tool for bankruptcy attorneys to use to protect such vehicles from Chapter 7 Trustees.
Likewise, arguments that the vehicle is held in a “resulting trust” by the Debtor for the benefit of the vehicle operator have been sometimes effective.
The argument against the allegations that the vehicle was fraudulently transferred to the operator by the debtor have likewise rested on the value of the equitable interest. If $0.00 in value was transferred, there is nothing for a Chapter 7 Trustee to recover in an avoidance action against the vehicle operator in possession.
All of these theories and defenses were thrown into doubt by a decision from Judge Tucker of the Eastern District of Michigan Bankruptcy Court in 2017.
BARE LEGAL TITLE AND THE MICHIGAN MOTOR VEHICLE CODE
In Stuart A. Gold, Trustee, v Novyce Harper, Judge Tucker took a hard look at these “defenses” from the perspective of the Michigan Motor Vehicle Code and the case-law arising from that state statute going back many decades.
This was a case in which the debtor filed the Chapter 7 bankruptcy case only 6 months after the lst monthly vehicle loan installment was paid, clearing title on the vehicle. The vehicle was titled to the debtor, but the down-payment for the vehicle, the installment payments, the insurance, and the care and maintenance of the vehicle were all accomplished by Harper, who could not originally get her own credit for a vehicle loan.
This was the classic Bare Legal Title scenario, and Harper lost the case and the vehicle to the Chapter 7 Trustee, Gold.
In this case, Judge Tucker noted that, within the Federal bankruptcy process, property interests are defined by the law of the state in which the bankruptcy case is filed.
In Michigan, he held that the Michigan Motor Vehicle Code (“MVC”) exclusively governs the question of vehicle ownership in Michigan and that it subjects vehicles in Michigan to title and transfer of title requirements.
The MVC, he stated, very clearly defines when a transfer of ownership of a vehicle has actually taken place: when the title has been transferred.
He looked at case-law as far back as 1952 to determine that compliance with the MVC titling requirements is the exclusive means of vehicle ownership transfer in Michigan.
That being so, the debtor in this case had not transferred title of the vehicle to Harper and had also not listed, disclosed, or exempted the vehicle in the original bankruptcy petition.
Judge Tucker specifically ruled against Harper’s argument that the debtor owned Bare Legal Title interest only because, as defined by the MVC, the name on the vehicle title is definitive as to ownership.
Further, Judge Tucker found Harper’s arguments regarding equitable ownership unpersuasive, and he noted that he had not found any Michigan case which recognized equitable ownership interests in vehicles.
In other words, the name on the title is the owner of the vehicle, in Judge Tucker’s view. Period.
CHAPTER 13 BANKRUPTCY IN MICHIGAN AND VEHICLE TITLING ISSUES
In a Chapter 13 bankruptcy, no assets are ever seized or liquidated (although, in egregious circumstances in which fraudulent transfers have clearly taken place to a shocking extent, Chapter 13 Trustees have filed motions to convert cases to Chapter 7).
Even so, the failure to protect assets with necessary exemptions can cause the debtor to be required to repay an equivalent dollar-value minimum to his or her unsecured creditors, thus making the case much more expensive.
The legal issues concerning a vehicle with the titling issues discussed here are therefore the same in either Chapter of bankruptcy.
A Chapter 13 Trustee is simply more unlikely to pursue the matter than a Chapter 7 Trustee, although this is certainly not something that can be guaranteed—particularly if your Chapter 13 is on Judge Tucker’s docket.
BARE LEGAL TITLE & MICHIGAN BANKRUPTCY: THE BOTTOM LINE
While Judge Tucker is just 1 of 6 bankruptcy judges in the Eastern District of Michigan and his opinion is not binding upon the others, it is a well-reasoned opinion that is now in the back pocket of every Chapter 7 Trustee in the state, certainly.
It is worth noting that Bare Legal Title remains a viable argument concerning ownership in other sorts of properties not governed by the Michigan Motor Vehicle Act.
However, any debtor considering bankruptcy must disclose to their attorney (prior to filing the case!) all vehicles to which they are or are not on title, even if he or she might not consider it to be “my car.” There is no exception for a mother, grandmother, spouse, or adult child.
If your bankruptcy attorney does not know about the vehicle, he or she cannot properly advise you of it. There is nothing easier for a Chapter 7 Trustee to discover than a vehicle title on record. Every Chapter 7 Trustee runs vehicle title searches routinely in every Chapter 7 bankruptcy matter in Michigan.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing Chapter 7 or Chapter 13.