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For some time, avoiding the lien on a vehicle in a Nebraska bankruptcy case was quite common.
If the debtor had what is called a non-purchase money security loan on an owned vehicle, meaning a creditor took out a security interest on property the debtor already owned (“a lien”), AND that lien impaired the Nebraska exemptions a debtor is entitled to under bankruptcy law, a bankruptcy attorney could request that the lien be avoided.
This allowed the debtor to own the vehicle free and clear of any interest of the creditor.
Avoiding liens in this manner ended upon the Nebraska Bankruptcy Court’s decision in In re Cardwell, BK 13-40623 last week.
The Bankruptcy Code allows a debtor to avoid a non-purchase money security lien on property such as household goods and furnishings, clothes, appliances, books, musical instruments, crops, animals, jewelry, prescribed health aids, and “tools of the trade”.
Note, the Bankruptcy Code does not list vehicles.
In Nebraska law, “tools of the trade” is defined as a motor vehicle used for someone’s business or used to get a person to and from work. It is the “tools of the trade” Nebraska bankruptcy exemption used frequently to protect a debtor’s vehicles from being liquidated by the bankruptcy trustee.
Debtor’s attorney in Cardwell argued that “tools of the trade” as used in the Bankruptcy Code to avoid liens should be the same used to define “tools of the trade” under Nebraska Bankruptcy Exemption law. The creditor’s attorney argued that while bankruptcy exemptions are defined by state law, Bankruptcy law is a federal law and “tools of the trade” under bankruptcy law should be defined by federal law.
The Nebraska Bankruptcy Court sided with the creditors and held that in order to avoid a lien on a vehicle in bankruptcy, a debtor had to prove that the vehicle was a reasonable necessity in the debtor’s trade or business and regularly uses the vehicle as a tool for the business. It specifically stated that a vehicle used solely for commuting to work is not a tool of the trade under Bankruptcy law.
The lien avoidance of vehicles in Nebraska bankruptcy cases is now limited to situations where the debtor has a business that the vehicle is regularly used for. No longer do normally employed debtors who use their vehicle to commute to work be allowed to avoid non-purchase money security liens on vehicles in Nebraska bankruptcy cases.