Auto Insurance & Bankruptcy: What Do They Have to Do with Each Other?

by Sam Marks

The other day I had the opportunity to meet with a client who was considering filing a chapter 7 bankruptcy here in the Southern District of Iowa. While discussing his monthly living expenses I asked the client if he had auto insurance. His answer was no. This reminded me about a married couple who didn’t have auto insurance when they filed bankruptcy and didn’t bother to carry it after they filed. I want to share their story with you.

In 2003 the couple filed a chapter 7 bankruptcy here in Des Moines. Everything went smoothly. The couple received their discharge and was relieved from their debts. Shortly after filing bankruptcy both the husband and wife began working at good jobs and started making some decent money. About two years after they filed their chapter 7 bankruptcy the couple were able to obtain financing for a $200,000.00 home. Everything was looking up for the husband and wife–but we know that I wouldn’t be writing this if everything remained fine.

In 2007 the wife was involved in an auto accident. Unfortunately, the wife caused the accident. She T-boned a motorcyclist (who was not wearing a helmet). I am not sure the price of the medical care but the last I checked it was over $300,000.00. Let’s be clear–accidents do happen and that is why we have auto insurance. This is where things turned bad for the family.

A lawsuit was filed against the couple for damages from the auto accident. Things got expensive. Eventually, the couple came back to see me for some financial help. I inquired about auto insurance and the husband and wife just sort of looked down and mumbled that they didn’t have any insurance when the accident occurred. The clients wanted to know if the bills involved in the auto accident could be discharged in bankruptcy. I told them that I had some good news and some bad news for them.

The good news was that unless the wife intentionally caused the accident (I guess it wouldn’t be an accident if she intentionally ran over the motorcyclist) or was under the influence drugs or alcohol when she was in the accident, the bills associated with the auto accident could be discharged in bankruptcy.

The bad news was that the couple couldn’t discharge the debt under chapter 7 of the bankruptcy code until 2011. Debtors must wait eight (8) years between filing chapter 7 bankruptcies. This news upset the couple and you could see the worry in their eyes that they would lose everything they had worked so hard to achieve.

That’s not the end of the story. There is more good news and more bad news.

The good news is that this couple may have been the luckiest people I have ever met. It turns out that they were eligible to file for a chapter 13 bankruptcy. Debtors only need to wait four (4) years after they file bankruptcy to file a chapter 13 bankruptcy. Not only were they eligible, they qualified for a chapter 13 bankruptcy because they had disposable income available to pay to their creditors. So it appeared that the bankruptcy court could provide some relief from some of their liability.  But…

Remember that I told you there was additional bad news?

This couple was required to pay to the Chapter 13 Trustee the sum of $2,294.64 each month for the next 60 months. In addition, they had to turn over all tax refunds received for the next 5 years.

Iowa law requires all drivers to be insured when they operate a motor vehicle. As a society, we want people to be able to take responsibility when they cause an accident. We don’t want people to be punished for having an accident and that is why Congress and the Courts give individuals who truly had an accident the opportunity for a fresh start under the bankruptcy court.

Just think how much money this couple would be saving each month if they just would have purchased an appropriate amount of coverage. I tell this story to everyone I meet with who doesn’t have auto insurance. These clients didn’t lose everything– just almost everything.

Please abide by the law and remember to keep your auto insurance current in order to protect yourself financially.

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