Bankruptcy expert Leon Bayer answers real-life questions.
“If you will redeem it, redeem it. But if you will not, tell me…”
A few years ago I took out a title loan on my truck. I am planning on filing for bankruptcy but need to keep my truck for work – I am a paint contractor.
My truck is worth much less than the blue book price because, although it’s in great mechanical condition, it’s covered with scrapes and paint splatters.
Can I redeem my truck in bankruptcy to get rid of the title loan?
Unfortunately, you won’t be able to redeem your truck in bankruptcy. But you have a another option for getting rid of the lien — “avoiding” the lien. I’ll explain what redemption is and why you can’t use it, and what avoiding a lien is and why this might work for you.
What Is Redemption in Bankruptcy?
In order to redeem a vehicle in bankruptcy, you pay the car title lender the current market value of the vehicle. If the lender rejects your redemption offer, you can file a motion asking the court to determine the current value or your automobile and grant an order requiring the lender to accept that amount of money. (To learn more, see Keeping Your Car in Chapter 7 Bankruptcy Through Redemption.)
But there are two big catches to redemption law that you won’t like.
- You can only redeem with a lump sum payment; you can’t do it installments.
- You can only redeem an item that is intended primarily for personal, family, or household use. A truck used primarily for work does not qualify.
Because of the second catch, you can’t use redemption to get rid of the truck lien. But here’s the good news – you have another option.
Avoiding the Truck Title Lien
You may be able to “avoid” the lien held by the title loan lender. If your case is successful, you get to keep the truck and you won’t have to pay anything.
In bankruptcy, you may be able to avoid (get rid of) a nonpossessory, nonpurchase money lien on tools of your trade, to the extent that the lien impairs an exemption that you are otherwise entitled to claim or if the trustee abandons the tool (in this case, your truck).
Below I’ll explain what all of these terms mean. (For a full explanation of avoiding liens in bankruptcy, see Avoiding Nonpossessory,Nonpurchase Money Liens in Bankruptcy.)
Federal and state laws list certain items of property that are “exempt” or safe from being taken away from you by the bankruptcy trustee. Your work truck is probably covered by one or more such exemptions. (Learn more in Nolo’s Bankruptcy Exemptions topic area.)
Even if your truck or other asset is not exempt, the bankruptcy trustee may choose to abandon an asset if it’s not worthwhile to sell it. For example, if your truck was 20 years old but not exempt, the cost to the trustee of taking it, storing it, and selling it would probably be more expensive than what the trustee could get from selling it. In this case, the trustee would abandon the truck.
(To learn more how this works, see Nolo’s article Will the Trustee Abandon my Car?)
A nonpossessory lien means that the borrower retains possession of the collateral. (An example of the opposite or a possessory lien, is an item on pawn — the pawn broker holds the item throughout the term of the loan.)
Nonpurchase Money Lien
A nonpurchase money lien is one where the money you borrowed was not used to buy the item. This happens when you already own the item (in your case, your truck), and then you use the item as collateral to get a loan.
Putting the Pieces Together
So let’s put this all together. Ask yourself these questions:
- Is your truck a tool of your trade, not used primarily for personal, family or household use?
- Does the state where you live allow you to exempt the current market value of your truck? (For articles on car exemption law in each of the 50 states, visit Nolo’s The Motor Vehicle Exemption in Bankruptcy topic page.)
- Under the title loan agreement, do you retain possession of the truck?
- Did you already own the truck when you got the loan (that is, you did not obtain the loan in order to buy the truck)?
If the answer to all of the above questions is yes, you can remove the title loan from your truck in your bankruptcy case. Assuming that you are granted a full bankruptcy discharge, you will be able to nullify the title lien and you will not be required to repay the truck loan.
So tell me, you will not redeem?
Leon Bayer is a Los Angeles bankruptcy attorney. He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy. The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo. By answering a question on this blog, Mr. Bayer does not become your lawyer.