Before bankruptcy, sometimes you need to borrow money from Mom. You might want to borrow that money and put her on your car title.
Now Congress made it illegal for me, a bankruptcy lawyer, to advise you to borrow money. But the Supreme Court said it’s legal for me to tell you that it’s legal for you to do it. (You may have to read that twice.)
It’s legal for me to tell you that it’s legal for you to borrow money from your mother before you file bankruptcy; although it is illegal for me to suggest that you do it.
I have an earlier blog on why you might want to do that. It explains why you might want to borrow money from a family member or friend and put them on the title to your car.
This blog, I want to talk about how.
When you borrow money against your car, you give your lender a “security interest” in the car. Your mother does not become the owner of the car, you still are. But she has the right to repossess the car if you don’t pay. (The same as the bank would.) That right is her “security” that you will pay her.
You need to give Mom the security interest in your car title at about the same time she lends you the money.
The Virginia DMV has a form for recording a security interest on your car title. It also works to create the security interest. You can get that form here. When you fill in that form and take it to the DMV, the DMV puts your mother on the title to your car as a “lien holder.”
(When your Mom or other family lender has a security interest in the car, she has the right to repossess the car, if you don’t pay. That’s a right against you and your car. When the security interest is perfected–put on the car title at the DMV–then your mother has a right to the car that’s in line ahead of other people–like the bankruptcy trustee. You want Mom to be in line in front of the trustee–I explain that here. That means the trustee can’t sell the car and pay your mother two cents on the dollar along with the credit cards that you are wiping out in the bankruptcy. And it avoids the problem of you having to walk to work because the bankruptcy trustee sold your car.)
If Mom lends you money against the car, you need to give Mom a copy of the form at about the same time she gives you the money; and you need to take the form to the DMV within 30 days. If you take longer than 30 days, then it’s a “preference”–in bankruptcy, preferences are bad.
While you are doing the paper work on this, you should probably also do an I O U. What friends call an I O U, lawyers call a “promissory note.” Suze Ornman has a form here. Your I O U is your written promise to pay back the money you borrowed. The security interest is the right to repossess the car if you don’t keep that promise.
For the paperwork to be complete, you should do both.