Unperfected Vehicle Liens

One of the documents we must provide the bankruptcy trustee is a current registration. When the trustee looks at the registration he checks to see that the lender’s name is on the registration. If the lender’s name is not on the registration that may mean that the lender did not “perfect” its lien. If the lender’s lien was not “perfected” (meaning it wasn’t recorded with the Department of Motor Vehicles) then the trustee can void the lien under § 544.

If the trustee voids the lien then the entire amount owing on the vehicle loan becomes an unsecured debt. Equity in the vehicle is created when the lien is voided.

Let’s take an example:

Let’s say the car is worth $10,000 and the vehicle loan is for $8,000. Before the lien is voided there is $2,000 equity in the vehicle and that equity is yours. (Let’s assume you have enough exemption to cover the $2,000 equity.) Now let’s assume that the unperfected $8,000 lien is voided by the trustee. Since there is now no lien on the vehicle $8,000 in equity has been created.

Do you, the debtor, receive that equity?

Unfortunately, the answer is no. That new equity is owned by the bankruptcy estate not the debtor. It may not be exempted. Under section 551 the amount of the voided lien is retained or “preserved” for the benefit of the estate.

So, after he voids the lien, the trustee owns an 8,000 interest in your vehicle. If you want to keep the vehicle you’ll have to buy the $8,000 equity from the trustee. If you don’t buy the equity the trustee will sell your vehicle to the highest bidder and give you the exempt amount ($2,000) off the top.

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