Means Test and Automobiles

Posted by Kevin on April 27, 2011 under Bankruptcy Blog | Be the First to Comment

The means test, as we have stated before, serves as a gatekeeper to who can file under Chapter 7.  If you are below the median income based on household size for your region, then you have passed.  If you are above median, the next step is to compare your average income for the previous six months against expenses.  For expenses, the means test looks at national expenses (food, auto), regional expenses (housing) and actual expenses.

One of the key deductions involves automobiles.  The means test has two expense lines which refer to automobiles: ownership costs and operating costs.  The ownership cost is a generous $490+ per month which can be applied to two vehicles.

The question becomes, what happens if you have paid your vehicle off in full?  Do you still get the ownership cost deduction?

A strict reading of the statute indicated that a debtor could take the expense even if no money were owed.  Many earlier cases agreed.  However, other cases said, it does not matter what the statute says;  how could you take a deduction for car payments when you are not making car payments?  The leading case for the side that held against ownership expense when no money was owed on the vehicle was the Ransom case in the 9th Circuit (out west).

Ransom went to the US Supreme Court recently and the Supremes held that a debtor who does not make loan payments or lease payments may not take the car ownership deduction.

The decision in Ransom can knock out almost $1000 per month in expenses on the means test.  That is a lot of money especially when an above median income debtor need only have excess income of $182 per month to fail the second portion of the means test.

What to do?  Well if you car is on its last legs, you can always go out and buy or lease a new or used car.  If you have loan or lease payments, you qualify for the ownership expense.  You could also borrow money and give the car as collateral.  However, this may result in more scrutiny by the trustee.

As  the 2005 Code winds its way through the appellate courts and sometimes to the Supreme Court, we will start to get more definitive rulings on issues.  Some will help the consumer.  Some will not.  At any rate, it is important that you seek out competent, experienced bankruptcy counsel to guide you on these issues.