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Hi, let me see if I can help you with this. To start, here's an interesting article about the very situation you seem to be involved with:
Please allow me some time to see if I can find any relevant caselaw, and I'll get back to you this afternoon. Thanks.
1) Is there case law to establish a statute of limitations for the lien-holder to protect their interest in the vehicle by taking it?
I did not find any case law directly addressing this issue. However, most courts examining whether a creditor could be compelled to pick up the surrendered property have held to the effect that the Bankruptcy Code does not force a creditor to assume ownership or take possession of the collateral.
See, e.g. IN RE ARSENAULT, 456 BR 627 - Bankr. Court, SD Georgia 2011
2) What risk of future liability do I take in selling the vehicle?
The case most on point as to this issue is In re Pratt, a 1st District Court of Appeals decision from 2006. Note that this case is not binding on an Arizona court, but it's the only case I could find that addresses a similar set of underlying facts. In re Pratt suggests that you might be able to reopen your case and file an adversary proceeding alleging a violation of the chapter 7 discharge injunction prescribed by Bankruptcy Code § 524(a)(2).
See In re Pratt, 462 F. 3dXXXXXof Appeals, 1st Circuit 2006
It's likely that you do NOT have clear title to the car, so selling it without first obtaining clear title from the financing company in some way could subject you to a potential lawsuit, either from the financing company or the eventual purchaser of the car (to whom you wouldn't be transferring clear title). In theory, your potential liability would be limited to the present value of the car, but there might be some complicating factors under state law that would allow your creditors to recover more (i.e. knowingly selling a car without valid title could be considered fraud and/or conversion, subjecting you to additional civil penalties).
If the lien release off the title was in error, does that eliminate their interest in their collateral? Specifically, is there any case law supporting the argument that they in fact lost their collateral due to their clerical error?
My gut instinct on this is that unless you actually have the Certificate of Title and/or the Lien Release to the car, the finance company would likely still try to claim they have a valid lien and blame any filing error on the DMV.
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