Means Test and Car Ownership
The United Supreme Court has ruled, in a case called Ransom vs. FIA Card Services, that above median income debtors are not entitled. to deduct the so called “ownership allowance” on the means test if the automobile they own is not subject to a lien.
What this means for individuals in Kentucky and Indiana contemplating filing bankruptcy is that in some very limited situations they may be required to file a Chapter 13 bankruptcy rather than Chapter 7 bankruptcy or they may be required pay a higher percentage of their debt back in Chapter 13. In order to fully comprehend the impact of this decision, a discussion of the means test is required.
The means test was added to the Bankruptcy Code as part of the Bankruptcy Reform Act of 2005. The stated purpose of the means test is to disqualify higher income debtors from filing Chapter 7 bankruptcy and require them instead to file Chapter 13 bankruptcy, where they are required to pay at least some of their unsecured debt back. The means test can also partially determine how much someone is required to pay his creditors in Chapter 13.
The starting point, and often the ending point, for the means test is one’s gross income. If one’s gross income is below the state median income for the state in which the debtor resides, the means test has been passed and the debtor is free to file Chapter 7 bankruptcy if he otherwise qualifies. Keep in mind that there are other factors besides the means test that determine eligibility for Chapter 7 bankruptcy, but below median income debtors need not concern themselves with any other aspects of the means test, such as the ownership allowance, which was the subject of the recent Supreme Court case.
To understand the limited impact of this decision, it should first be noted that over 80% of those filing for bankruptcy are below the median income, for whom this decision will have absolutely no impact. It will also not affect those above median debtors who own an automobile that has a lien on it, because those debtors will still be entitled to the deduction in question. Finally, the decision will also not affect those who have enough other allowable expenses so that their disposable income will have been reduced to a figure acceptable for them to file Chapter 7. So the number of individuals for whom this ruling will create a problem should be rather few.