One issue which comes up periodically when contemplating the filing of a bankruptcy is whether to purchase a new car prior to filing the case. Most chapter 7 debtors say that they need to purchase a car before the filing of the bankruptcy because they feel their credit will not allow them to purchase a car after the discharge. Most chapter 13 debtors say that they need a new car now, so they can survive the five year chapter 13. Generally, our experience has been that chapter 11 debtors rarely express these concerns. In each case the debtor intends to pay for the vehicle and retain it.
There is an Arizona statute, A.R.S. § 28-2133 which provides for the procedures relating to the recordation of a lien on a vehicle title. Essentially, what the statute means is that a creditor must perfect its security interest within 30 days of a new buyer taking possession of a vehicle, or the security interest may be set aside. The full text of the statute is as follows:
28-2133. Index and filing of liens, encumbrances or instruments; constructive notice
A. The department shall maintain an appropriate index of all liens, encumbrances or title retention instruments filed as provided by this article.
B. The filing and issuance of a new certificate of title as provided in this article is constructive notice to creditors of the owner or to subsequent purchasers of all liens and encumbrances against the vehicle described in the certificate of title, except those that are authorized by law and that are dependent on possession. If the documents referred to in this article are delivered to a registering office or an authorized third party provider of the department within thirty days after the date of their execution, the constructive notice dates from the time of execution. Otherwise, the notice dates from the time of receipt and filing of the documents by the department as shown by its endorsement. For the purposes of this subsection, the time stamp on the documents that is administered by the registering officer or authorized third party provider of the department electronically or otherwise is conclusive as to the time and date of delivery of the documents.
C. The method provided in subsection B of this section for giving constructive notice of a lien or encumbrance on a vehicle required to be titled and registered under section 28-2153 or a mobile home required to be titled under section 28-2063 is exclusive, except for liens dependent on possession. A lien, encumbrance or title retention instrument or document that evidences any of them and that is filed as provided by this article is exempt from the provisions of law that otherwise require or relate to the recording or filing of instruments creating or evidencing title retention or other liens or encumbrances on vehicles of a type subject to registration under this chapter.
D. Notwithstanding any other law and except as otherwise provided in this subsection, the failure of a motor vehicle dealer as defined in section 28-4301, a finance company or the department to complete the paperwork within thirty days as prescribed in subsection B of this section shall not result in the loss of the vehicle for either the lienholder or the person who purchased the vehicle. This subsection does not limit or negate the powers of a trustee under 11 United States Code section 547 or any successor statute.
So what, you may ask, has this to do with someone who decides to file for a bankruptcy and buys a car prior to the filing of the case? For a chapter 7, it means that if your new car lienholder DOES NOT properly perfect its lien within 30 days of taking delivery of the vehicle, then the Chapter 7 Trustee can get a court order that 1) voids the lienholder’s lien and 2) allows the Trustees to sell your car. You will get nothing, and no exemption proceeds from this action by the Trustee. The Trustee will use this money to pay a percentage to unsecured creditors who file claims in your chapter 7 case.
For a chapter 13, it means that if your new car lienholder DOES NOT properly perfect its lien within 30 days of taking delivery of the vehicle, then the Chapter 13 Trustee can get a court order that 1) voids the lienholder’s lien and 2) allows the Trustee to divert all the money that you would have paid to the car creditor through the chapter 13 plan to pay general unsecured creditors who file claims. You still get to keep the car in a chapter 13 and at the END of the case you get the title. If you do not finish the chapter 13, then the lien is restored if the case is dismissed. If the case is converted to chapter 7, the lien avoidance will be handled by the chapter 7 Trustee.
Bottom line is that you should seriously consider whether to file a bankruptcy after purchasing a new vehicle. You should definitely check to see if the lienholder has timely (no later than 30 days after delivery) filed its lien with the motor vehicle division. If you choose to file bankruptcy shortly after purchasing a new vehicle, it is extremely important that you contact competent bankruptcy counsel to guide you through the process so that your vehicle is not lost or put at risk of loss without your knowledge.