When Lending Money For A Family Member Or Friend To Purchase A Vehicle, Treat It As A Business Transaction.
One of the situations that I see all to often as a Bankruptcy attorney in Southwest Florida, is where a family member or friend has lent money to someone to purchase a vehicle but has failed to protect this loan with a properly perfected lien and security agreement. When lending money to a friend or family member no one wants to ask for a security interest because it makes it seem like you doesn’t think the person will pay the money back or that you are watching over their shoulder as “big brother.”
However, asking for a security interest when loaning money to a friend or family member actually serves to protect not only you the lender, but also protects the family member that is borrowing the money as well, especially if they are forced to file bankruptcy or have a judgment against them from a lawsuit.
Bankruptcy law requires that an individual account for the value of the equity in all personal property by either by making payments to the court to account for the value or by surrendering the property to be auctioned off for the benefit of the creditors. When a car does not have a properly perfected lien, the entire value of the car is considered to be an asset to the individual who is filing bankruptcy.
Proper perfection of a lien and creation of a security interest requires three steps, and while it may be argued that there are alternative ways to properly perfect a lien and create a security interest, what follows is a description of the procedures that will be most effective to make sure that not only the loan is protected but, that the individual you have loaned money to is protected from a creditor taking a vehicle that they have not finished “purchasing” yet.
The first and most important thing to have is a security agreement, in writing, that lists the item to be secured and does so with a degree of specificity. While it is enough to say identify the vehicle as the red 2001 Ford F150, it is better to use the vehicle identification number whenever possible to remove any doubt as to which vehicle is being described in the agreement. This security agreement should also state what the exchange of value was between the parties, i.e. “granting this security interest in exchange for $10,000.00.” This document should always be dated and notarized whenever possible. When ever possible if the transaction involves the gifting of money save any withdraw or deposit slips that show that the money has changed hands or if it is being paid directly to the dealer, a copy of the check or receipt.
The second thing is to create a note which sets forth the amount borrowed and a payment schedule to repay the loan. There is great argument over whether this is necessary or not, but in order to avoid the costs and headaches of litigation, it is best to create this document at the same time that you create the security agreement. It is important to note that these documents should be created at the time the money is loaned or as close to the time the money was loaned as possible.
The final step is to perfect the security interest by filing with the Department of Motor Vehicle’s in order to place a lien on the title. Placing the lien on the title puts all future creditors on notice that their potential interest is secondary to the interest of the original or primary lender. These forms can be found on the DMV’s website and should be completed as soon as possible after the vehicle as been purchased. There may be tax situations that arise from the lending of the money and nothing in this writing should be construed as tax advice, if you have any questions regarding tax liability you should contact your certified public accountant or other tax professional.
David M. Lampley, Esq. is a Consumer and Bankruptcy Attorney with The Dellutri Law Group, P.A. David works out of the firm's Fort Myers and Naples offices. He practices in the State and Federal Court's in Florida.
