If Your Name Is on the Vehicle’s Title and You File Bankruptcy—You Own It
No “Bare Legal Title” in the Eastern District of Michigan for Vehicles
“Bare Legal Title” has been an effective defense in Detroit, Michigan bankruptcy cases to the efforts of a Chapter 7 bankruptcy trustee to seize and liquidate a vehicle or other titled property. The argument comes into play when the filing debtor’s name lies on the title to the vehicle—but the debtor does not “equitably” own the vehicle. Meaning, the debtor has not paid for it, does not maintain it, does not insure it, and does not possess it.
This is not an uncommon situation. It can happen when a friend or a relative needs a car but doesn’t have sufficient credit worthiness to obtain a loan or has a suspended license. A friend or relative is convinced to either co-sign or sign entirely for the loan, which results in that friend or relative’s name ending up on the title.
So what happens when that friend or relative then needs to file for bankruptcy?
The concept of “bare legal title” derives from Section 541(d) of the US Bankruptcy Code. That Section states that that property in which a debtor holds only “legal” (on paper) title and not “equitable” title is excluded from the “bankruptcy estate” that is created upon the filing of a petition for bankruptcy (which automatically contains all property or claims in which the debtor has an interest). The Chapter 7 Trustee can only liquidate assets within the bankruptcy estate.
That means that, generally, that, if your name is on the title but you don’t really own the vehicle in the way described above (no equitable interest), there is no value that needs to be protected—and the vehicle is safe from the Chapter 7 trustee.
This is sometimes a non-issue if there is no equity value in the property anyway—for instance, if the car is worth less than is still owed on the car loan.
The Hilla Law Firm, PLLC has had no serious opposition to assertions of “bare legal title” interest in either Chapter 7 or Chapter 13 bankruptcies for many years.
However, that may now change.
A New Decision by Judge Tucker of the Eastern District of Michigan Bankruptcy Shreds “Bare Legal Title”
In the case recent case of Stuart A. Gold, Trustee, v. Novyce Harper (Adv. No. 15-05446-tjt), Judge Tucker ruled that, because the Michigan Vehicle Code states that a transfer of ownership of a vehicle can only occur by way of a transfer of the vehicle’s title (“on paper”) and that, otherwise, the owner of a vehicle is the person on that title, that there could, in this case, be no “bare legal title” ownership. Legal (“on paper”) ownership was “equitable” ownership (who paid for, maintains, and uses the property) simply because Michigan law says that this is the case.
It is important to note that, although a Federal legal process, Bankruptcy questions often rest on the directives of the laws of the state in which the bankruptcy case is filed.
The Defendant here, Harper, purchased the vehicle with the assistance of her friend, Ambrose-Burbank, whose name was on the purchase documents and the vehicle’s title. Burbank, after the vehicle was paid off in full, filed a Chapter 7 Bankruptcy. The Trustee, Gold, alleged that the vehicle, physically in the possession of Harper, had been transferred fraudulently, although Burbank listed the vehicle on her schedules as owned only via “bare legal title.”
Burbank did not place an exemption on the vehicle (an “exemption” is the language in the Federal Bankruptcy Code or Michigan law allowing an asset to be “exempted” from the Bankruptcy Estate, protecting it from the Chapter 7 Trustee’s liquidation powers). In defending the Trustee’s suit against Harper to recover the full-equity vehicle, neither Burbank nor Harper made any argument, although available, that Burbank held the vehicle’s title “in trust” for Harper, so Judge Tucker did not rule on those grounds.
Bare Legal Title Ownership: The Bottom Line
Although Judge Tucker’s decision is not binding on any other of the Eastern District of Michigan’s other judges, it is safe to presume that the other Chapter 7 Trustees have taken notice and that, anytime a Chapter 7 petition is filed in which “bare legal title” is asserted for a vehicle that does not have a lien against its full Bluebook value, there could be a serious problem protecting the property if the debtor does not have a sufficient exemption available to protect it from litigation.
Further, Trustees who recover property as having been transferred fraudulently are generally not exemptible at all.
Therefore, the phenomenon of “on paper ownership” will pose a further challenge and impediment in Detroit, Flint, and Bay City Chapter 7 bankruptcies. Such questions are exactly the reason why you should not attempt to file a bankruptcy without the assistance of an experienced bankruptcy attorney.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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