Family Loan to Buy Used Car Before BK Filing

[SlikkRick]

My sister lives in NC. $3500 vehicle equity exemption, possible bump to $9000 with "wildcard" exemptions added in. She's not working and has a $400+ car payment she obviously can't sustain. She's been told she can turn the car back in (pre-BK) for the current value of the loan, taking it off the books. That would leave her car-less.

She doesn't have any money to put into a used car, so my Dad is offering to find some way to get up to $9000 (assuming she can get the $9000 total exemption - otherwise $3500). He first thought of "gifting" her stocks (gifting so he wouldn't have to pay liquidation taxes on stocks) she could redeem the stocks to buy a used car, but sounds like that would be an asset that she would not be allowed to utilize and might be confiscated by a trustee. Certainly not desirable!

Next plan is for him to take out an unsecured loan and write up a second (separate) loan - a family loan - between he and her. He would be on the hook to pay back the unsecured loan to his lender. She would be at least morally on the hook to repay him, although I've been reading that his loan to her could be and may very well be discharged in BK, too. I'd hate to see him left hanging that way.

So, questions follow:

1. Should she turn back her current $400+ car to dealer before BK? She's close to having it repossessed at this point if she does nothing right now, anyway.

2. Are stock gifts or other monetary gifts from family simply considered assets that could easily be confiscated by a trustee if she hasn't used the gifts to buy another used car before BK?

3. If he takes out his own unsecured loan and then sends her the proceeds under the written directive that the proceeds constitute a loan between he and her, can she use the proceeds to buy a used car up to the auto equity exemption? I'm taking it that it absolutely has to be spelled out that it's a loan and not a gift to her.

4. Will his loan to her be immediately discharged by the BK disposition, leaving him hoping she'll pay him back instead of being on the hook legally?

Thanks so much. She does have a BK attorney in NC - just doing some extra leg work for her and Dad.

[LadyInTheRed]

She should do nothing without first discussing it with her attorney.

1. Is there a reasons she is delaying filing BK? If she files BK now, she will protected by the automatic stay for a while. Even after the stay expires, the lender will most likely wait until after discharge to repo the car. Your father can lender her money or give her a gift to purchase the car when the repo occurs, whether before or after discharge.

2. Any assets she owns at the time she files BK must be listed as her assets. The fact that they are gifts is irrelevant. If she can't exempt them, the trustee can take them.

3. Actually, if she spends it on a car before filing BK, then it fine for it to be a gift. If he loans her money, I see no reason why she can't spend it on a car before filing BK. But she must complete the purchase and any check must clear her account, before she files BK. If the money is still in her account on the date she files, it is an asset for BK purposes, whether a loan, a gift or intended to cover an outstanding check.

4. Unless she reaffirms the loan, it will be discharged if the loan is made before she files BK. Dad could insist it be a secured loan so that if she doesn't pay, he can repossess the car even if he can't sue her for a deficiency. That also has the advantage of reducing her equity in the car that she has to exempt.

It seems simpler to me for her to file BK and then have your dad give her a gift or loan after she files. Remember that, with few exceptions, events that occur after the date of filing are not relevant to the bankruptcy petition. If he gives her a gift after the filing date, the trustee cannot get it or any car she buys with it. But, doing it before the 341 could result in more scrutiny by the trustee.

I can't stress it enough: Please have your sister discuss this and any other pre-BK planning with her attorney. That is what her attorney is for.

[SlikkRick]

Hi, thanks for the response. Yes, she does have an attorney (who won't be back until Monday). I'm actually trying to give her the correct questions for the attorney when she communicates with him next time, just so she can lay out the scenarios and have him respond. In the interim, I'm trying to get a handle on the rules of BK in terms of dates, pre/post filing, etc. I appreciate your reply.

[bcohen]

The smartest course of action would be for your sister to quit paying on her current car loan, file for bankruptcy within 30 days of the missed payment being due, and continue driving the car payment-free until the lender picks it up. As long as she puts something other than "surrender" on the Statement of Intentions (for example, she could put "redeem") then the automatic stay will prevent the lender from repossessing the car until after the 341 hearing, and most will wait until after discharge. That means at least 3 to 4 months of payment-free use of that car, although she must keep it licensed and insured until the lender picks it up.

Once the case is filed, there is nothing to prevent her from buying another car with money acquired as a gift, as long as the gift was given AFTER filing. She will not need to worry about exempting the car, or those funds.