When an individual files a Chapter 7 bankruptcy the trustee can take his property and sell it to pay his debts. Of course certain property is exempt from creditors by law, and since people filing bankruptcy do not tend to have a lot of assets, in most Chapter 7 bankruptcies the debtors do not end up losing any of their possessions.
As a bankruptcy lawyer I do run into people, who have property in excess of the exemptions, and sometimes the question arises whether the court can take certain property that is in the debtor’s name, but which the debtor does not consider his or her property.
A common example would be, when a teenager buys a car with the earnings from her part time job, but she puts the car in her mother’s name for insurance purposes. If the mother goes bankrupt the court will consider taking the car to pay the mother’s debts, even though the daughter paid for the car and is its sole user.
One thing the mother could do in this situation is argue that while she holds legal title, there is a resulting trust giving her daughter the right to the equity in the car. Whether this argument will work depends on the facts. The courts will look at whether the debtor has had any use of the vehicle or made any contributions toward the cost. Obviously the best solution would have been to have the daughter put the car in her own name in the first place, so she would not have to worry about losing the argument in court, but since bankruptcies are normally unanticipated events, this does not always happen.
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