Transferred car title to brother for security on personal debt - mistake?

[Zeke]

Howdy:

I've posted here regarding my Chapter 7 bankruptcy that I'm endeavoring on...

Back in October of last year, I transferred title of my car to my brother for security on debts that I owe him. He was getting uncomfortable about me owing him money, and so I transferred title to him in Michigan. We didn't have to pay tax (familial transfer) and marked the value at $5000, which is fair market value for my vehicle. I paid the fees and new license plate, and he's insuring it thru his insurance. Yes, I still drive it.

I have been paying him off a little at a time as I sell my belongings and valuables to live on. I only owe him a little more and then the plan is to transfer the title back to me.

Since doing this deal, I have decided the only way to deal with my finance situation is to file chapter 7.

It looks like I'll be filing using CA laws, since I have lived there the past 15 years till October when I moved to Michigan, the $5400 exemption is more than enough to cover my car.

What should I do at this point? Leave it in his name, transfer it back to me? Will it be contested?

Thanks again for this great resource.

Zeke

[justbroke]

I could be completely wrong, but I think you have a preferential transfer which is avoidable by the Trustee. You do not own the car, your brother owns the car. To compound that issue, you did this as an insider preference. If I'm reading correctly, you borrowed form your brother, and then, after being unable to pay him back, transferred the car as security. This could be considered a preferential transfer to an insider.

The proper way to have done this, from what I know, would have been for your brother to place on lien on the vehicle at the time that he loaned you money. Your brother would have needed to perfect that lien under your State's non-bankruptcy laws by having the title show him as lienholder. He could have even "physically held" the paper title until such time that you paid, but the title would need to reflect him as lienholder, not owner.

Even if he transfers the title back to you, if the Trustee pokes enough, they may see that this is nothing more than an insider preference and that the transfer from you to him and back to you wasn't properly perfected. As such, the payments to your brother may be considered preferential and the entire amount "could be" clawed back. The Trustee would claw it back by making a demand upon your brother and possibly suing your brother within the bankruptcy (via an adversary proceeding).

I do not know if California allows non-residents to use their exemption scheme. You would need to make that determination and if you are not allowed, as a non-resident, then you'd need to use the Federal Exemption scheme. (From all that I know, California does allow non-residents to use their exemption scheme if they were previously a resident and meet the requirements. You must verify this yourself.)

Personally, I would obtain some consultations with several attorneys in Michigan. i would ask about that specific scenario and whether it could be considered an insider preferential transfer.

[Zeke]

Thanks.... I guess, I don't understand why it matters, because had I kept the car in my name, there is plenty of exemption available for my car to have been exempt under the law.

What do you mean by "avoidable"? If I tell the trustee (that's the gov't representative yes?) that I'm not hiding what was done, then what does it matter? I'm def no lawyer, I did not consider the lien thing at all. I trust my brother enough not to screw me, so we knew that transferring title was the easy way of accomplishing.

Don't see how I could be considered a non-resident - as far as I've been able to figure out, the federal bankruptcy laws have recently changed, FORCING me to use California's laws, which happen to be better than Michigan's... or so it would seem. I had planned on opting for using the Federal laws as it would have entitled the use of the federal wildcard exemption - this is an option under Michigan's BR law - not as nice as CA's, but it's more than enough for my meager possessions.

Anyone else have an opinion?

Thanks

[despritfreya]

1. YOU NEED TO CONSULT WITH A BK ATTNY.

2. The transfer of the title to the insider (your brother) back in October as a result of an antecedent debt IS a voidable preference.

3. All payments you have made to your brother over the past one year are most likely, avoidable preferences.

4. AFTER CONSULTING WITH AN ATTNY, the most likely advice will be to undo the transfer.

a. Title is returned to you before filing bk;
b. The actual transfer to brother is listed in question 10 of the Statement of Financial Affairs with a notation that the transfer has been reversed;
c. You claim whatever exemption would be allowed on the vehicle and then, after filing, wait to see if the Trustee has an issue with it. In my experience, so long as you undo the damage and disclose, disclose, disclose, the exemption will be allowed; and
d. Brother is listed as a general unsecured creditor on Schedule F, just like all other general unsecured creditors.

Des.

[justbroke]

As for the residency question, there are some states that actually do not allow non-residents to use their exemptions. Remember, bankruptcy law applies state laws as well. If a particular state does not allow non-residents to use that State's exemptions, then you cannot. Fortunately for you, and I don't think it matters anyhow, California appears to allow former residents to use California System I or System II if all other requirements are met. (In cases where the former State does not allow non-residents to use their exemptions, you fallback to Federal. In this case, California System II and the Federal Exemptions are very generous with the wildcard/unused homestead exemption.)

As for the question as to the preference, desprifreya provides an excellent response and some next steps for you!

[Zeke]

1. YOU NEED TO CONSULT WITH A BK ATTNY.

2. The transfer of the title to the insider (your brother) back in October as a result of an antecedent debt IS a voidable preference.

3. All payments you have made to your brother over the past one year are most likely, avoidable preferences.

4. AFTER CONSULTING WITH AN ATTNY, the most likely advice will be to undo the transfer.

a. Title is returned to you before filing bk;
b. The actual transfer to brother is listed in question 10 of the Statement of Financial Affairs with a notation that the transfer has been reversed;
c. You claim whatever exemption would be allowed on the vehicle and then, after filing, wait to see if the Trustee has an issue with it. In my experience, so long as you undo the damage and disclose, disclose, disclose, the exemption will be allowed; and
d. Brother is listed as a general unsecured creditor on Schedule F, just like all other general unsecured creditors.

Des.

Good God, what have I done? It's like everything I've done is against the rules....

I wanted to be on the UP AND UP with my family so they would not think I was freeloading......

I am planning to have an attorney deal with my BR, I have a call into one now, and will be using the remainder of the money I can generate by selling my stuff to pay for it.....

OK, so what you're saying, if I can pull my head out of my can, is that I need to have the transfer to my brother reversed, then with full disclosure, proceed....

Zeke

[justbroke]

OK, so what you're saying, if I can pull my head out of my can, is that I need to have the transfer to my brother reversed, then with full disclosure, proceed....

Yes. And the $5000 question will be whether or not the Trustee will still attempt to recover the payments that you made to your brother over the last year since those would be a preference. (It is a preference if you didn't pay your other creditors what they were due... pro rata.)

I wouldn't beat myself up over this. This happens quite frequently. People are not "planning" to file bankruptcy and they do what they deem is right. On a personal level, paying back family and friends always seems the moral thing to do. However, the bankruptcy code takes a hyper-technical and even-handed approach to this. The BK code seeks to treat ALL (unsecured) creditors the same (some minor exceptions when it comes to secured, priority and unsecured creditors). When you file for bankruptcy, all the nice things you tried to do in order to protect family and relationships, does come back to haunt you.

Again, you can get through this. Consulting with and finding the right attorney should help you through this.

[Zeke]

Sheesh.....

I had to sleep on this, seems like every desperate act I've done the past year regarding finances just creates more and more trouble.

Ok, I will be seeking out attorneys, in the meantime...

What is worst case?

Can't File?
Have to pay for/redeem my car? Or, lose car?

If I'm being straight and offer disclosure, there can't be any legal repercussions right?

In a nutshell, if I have to surrender my car, fine, but being able to file now and be done with this is important.

Yes, I'm getting legal advice.

Thanks.

[justbroke]

The worst case actually doesn't affect you personally. The not so nice thing about preferences, is that the Trustee goes after the property (or money) from the person to whom you transferred said property (or money). The Trustee "could" hypothetically claw the car back from your brother and then sell it for the benefit of the Estate. The Trustee "could" also claw back the payments you sent to your brother "if" that is deemed to be a preference, and then distribute it to the unsecured creditors pro rata.

There are a lot of unknowns and you need to speak with an attorney. As desprifreya wrote, you may be able to undue the transfer of the car and fix some other things to reduce any preference issues. Again, preference clawbacks generally affects (hurts) the transferee (the person you transferred the property to) and not the transferror (you).

You have time and you can file this properly. I just would more the strongly discourage any pro se filing in this particular case.

[despritfreya]

Cut and pasted from my other post because I put it in the wrong thread. . .

Zeke,

I need to chime in here. You have come to this Forum for assistance. You have made a wise choice. You now know that you need to address several issues before you file bk. The fact that you are now aware of at least some of those issues puts you far ahead of some other consumer who might be in a similar situation. And. . . many consumers do similar things as you such as giving a vehicle to satisfy a family debt and/or depositing funds into a family members bank account because that was the only thing to do.

You need to stop second guessing what you did. As I said in the other thread, in a non-bk world your actions were not "wrong". They are not even "wrong" in a bk-world. It is just that in a bk-world certain actions have certain consequences. So long as you are aware of the consequences you can react according to what is in your best interest to get you through the system.

You are now armed with information you did not have before. You will now meet with one or more bk attnys and discuss these issues with them. The attny will assist you in making the best decision as it relates to the issues. This is a darn sight better than jumping into a bk without knowing the potential outcome and getting "caught with your pants down".

So, what I am trying to say is, don't despair or feel guilty or not in control. You are in control and you will make the right choice.

Des.

[df04527]

Well said Des!

[Zeke]

Thanks guys. I'm getting the hang of it, and feeling much better about it tonight. After all, I've already lost alot thru this process, so a little bit more won't kill me.

It IS IS IS really great to have some ammo for questions and knowing where the snags lie is excellent. I would prefer, if it's likely to happen, that my brother just sign the car over to the trustee if I'm going to lose it anyway. It's just a car, it's worth about $5000, my brother even offered to help me buy it back (if that's possible) and then I could pay him back after BR and I'm working again.

We will figure it out.

Really appreciate you guys chilling me out.

Thanks

Zeke