The Supreme Court will determine when a debtor can keep a personal car

The Supreme Court of the Russian Federation (SC) will decide whether it is possible to leave a car for personal and family needs to a bankrupt citizen. As a general rule, the car is included in the bankruptcy estate and sold to pay off debts to creditors, but the courts may make exceptions. In this case, the debtor refers to poor health and four children who need to be transported to kindergarten, school, and clubs, specifying that the sale of an old car will do little to help creditors. The lower courts refused to leave the bankrupt car, but following a complaint from the debtor, the dispute was referred to the Economic Collegium of the Supreme Court. Lawyers believe it is possible to keep the car for medical reasons, but not for transporting children, otherwise this will lead to “a boom in litigation from family debtors.”

The Supreme Court will consider dispute about in what case a debtor citizen can keep a personal car. Kristina Mikhailova was declared bankrupt in 2020. Her financial manager included the debtor’s 2008 Ford Transit VAN in the bankruptcy estate. Mrs. Mikhailova asked to exclude the car, emphasizing that it was “necessary for a normal existence,” given the ban on physical activity for health reasons and the presence of children.

The Arbitration Court of the Astrakhan Region granted the debtor’s request, deciding that the sale of the car would violate “the rights of the debtor’s minor children,” as well as “a fair balance between the property interests of creditors and the personal rights of the debtor.”

But the appeal overturned this decision, leaving the car in the bankruptcy estate. The court explained that the disputed vehicle does not fall into the category of property that cannot be foreclosed on, and “is not a special means allocated for the purpose of social support for a family with children.”

The appeal also noted that the debtor’s spouse would receive half of the money from the sale of the marital vehicle, which “may be used to purchase a replacement vehicle.”

In addition, the court did not see the need for a personal car for the family and “the impossibility of using other means of transportation, including public transport or taxis.”

The cassation agreed with this. Insisting on the “right to a decent life” for herself and her family members, Kristina Mikhailova appealed to the Supreme Court. The complaint states that the disputed car is used to transport four minor children to school and preschool educational institutions, to additional education institutions, to a clinic and to sections. In addition, Ms. Mikhailova clarified, “there is no public transport or minibus service” along her street (the debtor lives in the private sector).

And given the low cost of the car, “income from its sale will not significantly affect the satisfaction of creditors’ claims,” the debtor emphasized.

Her arguments attracted the attention of the Supreme Court, and the dispute was referred to the Economic Collegium, with a hearing scheduled for December 18.

Meanwhile, judging by the materials of the bankruptcy case, the financial manager is already preparing to sell the car, valuing it at 560 thousand rubles. But in connection with the debtor’s complaint to the Supreme Court, the court of first instance postponed the issue of approving the procedure for conducting these auctions. The issue of preserving a car in order to protect the rights of the debtor’s minor children is being considered by the Economic College of the Supreme Court for the first time, notes arbitration manager Sergei Domnin.

In 2020, another bankrupt attempted to leave his car for work, but the Supreme Court refused, as it considered it unproven that without a car a citizen would not be able to receive income.

Practice allows courts to exclude from the bankruptcy estate property that does not have immunity from collection (these are: the only home, household items, personal items, with the exception of luxury items, etc.). The Plenum of the Supreme Court in 2018 explained that the court can expand the list of property left to the debtor if it considers that it is necessary “to maintain the life of a citizen and meet his vital needs.”

In most cases, the courts agree to keep the car if the debtor or his immediate relatives have a specific disability, says Valeria Gerasimenko, head of the union council of the National Center for Restructuring and Bankruptcy. Lawyers are skeptical about the appeal’s proposal to buy a replacement car for half the cost of the old one. “Given current prices, this is unrealistic,” believes Viktor Panchenko, head of the restructuring and bankruptcy practice of YUR-PROJECT. However, “bankruptcy does not imply the preservation of the previous level of well-being for the debtor and his family members,” emphasizes Anton Krasnikov, partner at Sotheby’s law firm.

In such disputes, it is impossible to establish a universal rule, experts agree.

To resolve the issue of preserving the car, “a personalized approach is needed”: the identity of the debtor, his professional activity, the presence of diseases, marital status, and characteristics of the car matter, explains Valeria Gerasimenko.

Sergei Domnin believes that the outcome of the case of Kristina Mikhailova could become “another example of the manifestation of paternalism of the RF Armed Forces in relation to debtor citizens.” But motivation is important here. Taking into account all the circumstances, the exclusion of a car from the bankruptcy estate must be connected “with the debtor’s urgent need to operate it” and occur “in exceptional cases,” emphasizes Anton Krasnikov. Victor Panchenko believes that in this case they only include the need for a car for medical reasons (disability of the debtor or his relatives), but not for transporting children.

If the Supreme Court leaves the car bankrupt in order to protect the rights of children, this may lead to a “boom of proceedings” on the part of all “family debtors,” warns Mr. Domnin. In this case, Anton Krasnikov fears “the formation of a negative practice for creditors, since a car may be the debtor’s only liquid asset.” He points out that in this case the bankrupt’s outstanding debts amount to 2.4 million rubles, so even 280 thousand rubles. (half the cost of the Ford) will “significantly improve” the position of creditors.

Anna Zanina