Why You Must Have Adequate Car Insurance When Filing Bankruptcy

Car Insurance and Filing Bankruptcy

If a debtor is filing bankruptcy and owns a vehicle, they must have insurance on the vehicle whether or not it is fully paid for.   Even if the debtor is not driving the vehicle, they will still need to insure it or hand over the keys to the bankruptcy trustee. Why?

Let’s take a look at the facts:

  1. When a debtor files bankruptcy all of their assets become part of the bankruptcy estate.  Even assets which are fully paid for and which are covered by bankruptcy exemptions will be part of the bankruptcy estate.
  2. Because an asset is part of the bankruptcy estate, the trustee is responsible for making sure that the value of those assets is protected. Uninsured vehicles are at risk of losing value due to damage especially if they are uninsured.  While this may seem like it should not be an issue if the debtor is using the bankruptcy exemption to keep the asset from creditors, it can still be a liability issue for the bankruptcy estate. For example, if a debtor’s bankruptcy exemption for their vehicle is successfully challenged by a creditor, then the vehicle will have value for that creditor.  If the vehicle is destroyed and there is no insurance to cover the value, the creditor loses out.
  3. If a debtor has a car accident in their vehicle and does not have insurance, the victim of the accident can sue the debtor and file a claim with the bankruptcy court. Because the post-petition claim cannot be discharged in bankruptcy, the bankruptcy estate’s value will be diminished by its obligation to pay the new creditor. Not to mention the fact that the new debt can survive the bankruptcy discharge and jeopardize the debtor’s fresh start.