Keeping a vehicle while bankrupt
A bankrupt can keep their vehicle if it is used as a primary means of transportation, its value is less than the prescribed threshold and, if the vehicle is financed, the repayments are maintained.
“Prescribed Threshold” for Vehicles
The prescribed threshold is the indexed amount a bankrupt can keep a vehicle. This amount is indexed and is currently $7,900. To check the most current threshold please visit https://www.afsa.gov.au/insolvency/how-we-can-help/indexed-amounts-0. If the value of the vehicle is less than this threshold, it is protected. If the bankrupt has more than one vehicle, so long as the aggregate value is less than the threshold, they are protected.
“Primary Means of Transportation”
This definition is important when applying the threshold to vehicles. Ordinarily, primary means of transportation is defined as a vehicle mainly used by the bankrupt. Most vehicles which fit this definition are cars, motorcycles, trucks and bicycles.
Vehicles which would not fit this description include caravans, trailers, horse floats or any vehicles kept which are deregistered and/or collection pieces. Vehicles not used as a primary vehicle can be sold by the trustee.
How to calculate the value of the vehicles
It can be difficult to value vehicles because of variables such as damage and the odometer reading which can have a significant impact on its worth. A good starting point is www.redbook.com.au which can give an indication of the vehicle’s value. The bankrupt can also obtain their own valuation and provide it to the trustee for consideration, if required.
Vehicles that are leased and under finance
A vehicle secured under a lease or loan can be kept during bankruptcy provided the payments under the loan are met and the value of the vehicle is equal to or less than the amount owed. If the vehicle is valued more than the loan amount, as long as the net value is equal to or less than the prescribed threshold, the vehicle will not be an asset of the bankrupt estate.
If the vehicle is secured to a loan or lease and the bankrupt is not able to continue with the repayments, they can surrender the vehicle. If the repayments are in arrears, the lender can repossess and sell the vehicle. It is recommended the bankrupt contact the lender to discuss repossession, or the voluntary surrender of the vehicle.
If the vehicle is sold at auction by the lender, it is common the net auction proceeds are usually less than the amount owing to the lender. This shortfall is listed in the bankruptcy as an unsecured creditor and the lender is not able to pursue the bankrupt for this unsecured amount.
How does the trustee determine the value of the vehicle to the estate?
The trustee will assess the amount of “equity” in the vehicle(s) which usually involves some or all of the following steps: -
- RMS search;
- Obtain a valuation by Redbook or registered valuer;
- Check the Personal Properties Security Register (“PPSR”) for security against vehicles in the Bankrupt’s name;
- If secured creditors, deduct amounts owing cured creditors;
- Deduct amounts owed to secured lenders;
- If there are co-owners, apportion the share belonging to the bankrupt;
- Deduct the statutory threshold amount.
- If there is a positive amount, this is the equity available to the bankrupt estate.
- If this is a negative amount, the vehicle(s) will be not be an asset of the bankrupt estate.
The equity in the vehicle is more than the threshold, what happens now?
The trustee can collect and sell the vehicle or, the spouse, co-owner or third party can purchase the equity in the vehicle. If a secured creditor is involved, the trustee needs the secured creditor’s permission to sell the vehicle.
For example, if the bankrupt owns a vehicle equally with another, e.g. spouse, valued at $30,000 and there is no finance; $15,000 will represent the share belonging to the co-owner and $15,000 to the bankrupt. When the threshold is applied, there is $7,100 in equity which vests in the bankrupt estate ($15,000 less $7,900).
The co-owner could choose to pay $7,100 to the bankrupt estate, or the Trustee could take the vehicle, and have it sold at auction. If the vehicle is sold at auction, the co-owner will be paid 50% of the proceeds from the sale of the vehicle, the bankrupt will be paid the $7,900 threshold, and the remaining funds will be paid to the bankrupt estate.
How to establish whether a vehicle is jointly owned or not?
This isn’t always easy to do because registration doesn’t prove ownership. To determine the ownership of a vehicle, the below questions may be asked: -
- Who purchased the vehicle?
- Who is making the car repayments?
- Is the purpose of the vehicle to be used by one or more people?
- Who pays for the maintenance, petrol and other vehicle incidentals?
- Are payments for the vehicle made from a joint account?
- Supporting documents are required to evidence any claim being made.
Can a bankrupt sell their vehicle during bankruptcy, and if so, what happens to the sale proceeds?
Yes, a bankrupt can sell the vehicle during bankruptcy. If the vehicle has been deemed protected, the funds from the sale will also be protected. It is a good idea for bankrupts to keep all documents relating to the sale, and they communicate their intentions with their trustee prior to taking any actions to sell an asset.
Can a bankrupt buy a vehicle during bankruptcy?
Yes. A bankrupt can purchase a vehicle during bankruptcy, and if the vehicle is under the threshold, it will be protected. If the value of the vehicle is greater than the threshold, the trustee could claim this and sell it. If the bankrupt gets a loan to purchase the vehicle, they may need to advise the lender they are bankrupt, and they will be liable for any debts incurred after the date of bankruptcy.
If a vehicle is bought after bankruptcy it is a good idea for bankrupts to keep all documents relating to the purchase and communicate their intentions with the trustee prior to purchasing the vehicle.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.