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Car- Means Test

Posted by Kevin on July 16, 2011 under Bankruptcy Blog | Be the First to Comment

The 2005 Act, BAPCPA, requires that a debtor submit to a means test to determine eligibility for Chapter 7.  The means test was based on an IRS test to determine what part of income a taxpayer can pay on back taxes.

The means test has a two part test for motor vehicles.  The first is an ownership allowance.  The second is an operations allowance.  The ownership allowance gives the debtor a $496 deduction per vehicle per month no matter what you owe on it.  If your monthly payment is $200- you get $496.  If your monthly payment is $600- you get $496.  But what happens if you have your vehicle paid off?

Well, there was what they call a split in authority.  That means some circuit courts said the debtor gets the deduct, others circuits say no pay, no deduct.  It was one of the few cases under BAPCPA that went to the Supremes.  The Supremes said no pay, no deduct.

So, if you are down to your last few payments on your car loan, you get to deduct $496 on the means test.  But if you made your last payment a month before the filing, you are SOL.  Harsh.  Losing a $496 deduction on the means test can easily be the difference between Chapter 7 with no payments and Chapter 13 with 60 months of payments.

Some aggressive consumer lawyers are taking the position that if you owe nothing on your car, borrow $1000 from your brother in law  and give him a security interest in the car.  $1000 buys you $496.  Although clever, I cannot say whether this tactic will hold up in Court if the trustee takes a strong stand on it.

Another less aggressive tactic which has been upheld by some courts is to take an additional $200 on operations deduction if your paid off car is considered an older car.  Although no definition of older car is in the Code, I would venture to say that a 6 year old car with over 100K miles would qualify.

At any rate, this is another reason for North Jersey consumers to seek out the assistance of an experienced bankruptcy attorney to guide them through the intricacies of the Code.

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