Supreme Court Limits Allowance for Car Ownership Expense in Bankruptcy

This week the Supreme Court handed down its long awaited decision in the case of Ransom v. FIA Card Services N.A. which dealt with the expense allowance a bankrupt individual can claim on the means test for ownership of a vehicle.

The means test came into the law in 2005 and applies a formula to determine, if an individual has monthly disposable income, which is high enough to enable him or to pay back part of his or her unsecured debt. Basically the means test takes the debtor’s average income for the last six months, and then subtracts out allowances for various expenses. Most of the allowances such as food, clothing, utilities and transportation are standard amounts used by all debtors. Some of the allowances however, such as taxes, medical, and child support are based on the debtor’s actual expenses.

If the means test shows the debtor has enough disposable income the law requires him or her to file a Chapter 13 Bankruptcy in which the individual will make monthly payments for five years toward the debts. If the means test shows the income is not high enough the debtor may file a Chapter 7 bankruptcy and receive a discharge in about three months. The means test is also important when the individual files a Chapter 13, because the courts will look to the means test to calculate how much the debtor’s plan must pay toward his or her unsecured debts.

The means test includes a vehicle ownership expense for up to two vehicles owned by a household. It also includes a vehicle operating expense. The ownership allowance varies by locality and debtors living in Northern Illinois can currently claim an allowance for $496 for each car every month. In the five years since Congress enacted the means test, the courts have split on whether every individual owning a car may claim the car allowance or whether it is only available to debtors making car payments. The question can often make or break a bankruptcy plan, since at $496 a month the amount the debtor will have to pay over the life of his Chapter 13 plan will come to $29,760.

On January 11, 2011 with Justice Kagan rendering her first opinion, the Supreme Court decided in the case of , Ransom v. FIA Card Services N.A, that the ownership allowance is only available to debtors making loan or lease payments on the car. The decision now becomes the law of the land.