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U.S. Supreme Court Makes It More Difficult To Pass Means Test By Reducing Car Allowances

By Jonathan Alper

The U.S. Supreme Court issued a decision on January 11, 2011, making it more difficult for debtors to pass the Chapter 7 means test. The means test includes two car related deductions from income. Debtor's may be eligible to deduct from income an allowance for car-operating costs and a separate allowance for car-ownership costs. The amount of the debtor's allowances are based upon published table of National and Local Standard as well as their actual expenses.

The Supreme Court case involved the means test filed by a debtor who owned a car free and clear of any debt and liens. The issue in this case was whether such debtor can claim the car-ownership allowance when the debtor has no monthly car payment and his only car expenses are those related to car operations. 

In the past, many attorneys, myself included, claimed both a car-operating and car-ownership allowance even through the debtor had paid off his car or leased a car. The car-ownership allowance (a bonus deduction for debtors without car payments) frequently was the deciding factor in the debtor's eligibility for Chapter 7 bankruptcy.

The U.S. Supreme court held that debtors who have no monthly car payment cannot use a car-ownership allowance in the means test. The Court decided that the means test allowed "applicable" expenses, and that debtor's without a car payment did not have an "applicable" ownership costs.

The decision encourages prospective bankruptcy debtors to buy a new car with a car loan prior to filing bankruptcy in order to pass the means test, and to this extent, the decision makes it more difficult for debtor's to get a "fresh start" after their bankruptcy case.

Ransom v. FIA Card Services et. al. Case No. 09-907

Full post as published by Florida Bankruptcy Law on January 31, 2011 (boomark / email).