The bankruptcy means test forces debtors who earn high incomes to pay back their creditors a certain amount of money as determined by the results of a formula. In this formula, there are many types of deductions that a debtor can take which will result in a lower Chapter 13 payment. The bankruptcy means test formula recently became a bit meaner with a decision handed down by the United States Supreme Court in Ransom v. FIA Card Services. In this decision, the Court ruled that a bankruptcy debtor cannot take a deduction for “ownership costs” for automobiles that they own outright.
In Ransom, the debtor claimed a deduction for the operation of the car and ownership of it. Any debtor who owes money on their vehicle can take both deductions without any objections. The problem for Mr. Ransom was that he owns his car free and clear. As a consequence, the credit card company objected to his claiming the ownership expense on the bankruptcy means test.
The Ransom decision will penalize bankruptcy debtors who have worked diligently to pay off their cars prior to filing and reward debtors who still owe on their vehicles. As a consequence of this decision, debtors who have incomes that are higher than the median income levels for a family of their size and have paid off all debt on their cars before filing will pay more money to their creditors over the life of their chapter 13 plans.
Georgia bankruptcy expert Jonathan Ginsberg writes that “instead of encouraging people to avoid debt, the Ransom decision encourages filers to incur more debt prior to filing. In this upside down logic, a debtor would benefit from taking out a car title loan prior to bankruptcy since having debt owned on a car will allow that debtor to claim an ownership expense” (see Ginsberg blog).
While I agree with Mr. Ginsberg’s analysis, the Bankruptcy Code specifically prevents me from advising any debtor to go out an incur a debt before we file their case so that we can maximize their deductions on the bankruptcy means test.
While I can’t ever tell you to incur new debt, I can go over your entire economic situation with you to see how Chapter 13 or Chapter 7 bankruptcy can help you. Call me today at 706-295-0030 for your free consultation.