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.
So how exactly does the means test work? The means test contains two components, income and expenses. Since below median income debtors automatically pass the means test, they need only fill out the income portion of the form. For those who are above median, they must fill out both the income and expense portion of the form.
First, a figure called “current monthly income” is arrived at. This is done by adding up all of the debtors gross income from all sources except social security over the prior 6 months and coming up with a monthly average. Then the debtor starts entering expenses on the form. For some types of expenses, the debtor is allowed to list actual expenses, while for other types of expenses, the debtor is only allowed fixed allowances that are provided by the Bankruptcy Code. After deducting the expenses from the income, a figure called “disposable monthly income” is arrived at. This figure is then multiplied by 60 and if the resulting figure is either 10,000 or more or a figure that exceeds 25% of the the debtor’s unsecured debt, then the filing of Chapter 7 is presumed to be an abuse.
One of the “fixed expenses” provided under the means test is an ownership allowance for an automobile, which currently is 496.00 per month. Prior to the Supreme Court’s decision, several appellate courts had allowed the debtor to claim this deduction whether he had a payment on his automobile or not. The Supreme Court has now held that the allowance is only available for those debtors who actually have a vehicle payment, which could for some cause them to fail the means test.
However, as previously noted, the vast majority of debtors will pass the means test by virtue of their gross income being below the state medium and many of those who are above median will also pass as result of having enough allowable expenses. As a result, this decision should not impact very many people in Kentucky or Indiana who are filing bankruptcy.