The U.S. Supreme Court in Ransom vs. Fla Card Services ruled last month that a person that owns a vehicle free and clear when filing a Chapter 13 bankruptcy may not take a vehicle ownership deduction when calculating disposable income under the means test. The means test in a Chapter 13 bankruptcy is used to calculate whether a debtor has enough disposable income to make payments to unsecured creditors like credit card companies. The Supreme Court found that while Ransom could claim an operation expense for his vehicle he could not also claim an ownership expense because the vehicle was owned outright meaning there was no monthly payment.
This decision could pose problems for those attempting to complete a Chapter 13 bankruptcy payment plan. A vehicle that is owned outright is going to tend to be an older vehicle that is more likely to have mechanical problems or need replacement. A Chapter 13 repayment plan may be paid over a 5 year term. There is a high probability that a debtor who is making payments on a Chapter 13 bankruptcy plan over a 5 year period will at some point need extra income to replace or repair his or her vehicle but that buffer is no longer available because of the Supreme Court’s ruling. This may mean that debtors whose car no longer functions may be unable to get to work resulting in their losing their job. This loss of income will prevent more debtors from continuing to make their mortgage payment and an inability to complete their Chapter 13 plan payments.
This ruling disallowing a vehicle ownership expense for vehicles that are paid off seems even stranger when considered in terms of the incentives created by the ruling. A person who knows they have an older vehicle, which may not survive the term of the Chapter 13 payment plan, might be motivated to sell the older vehicle that is paid off and buy a newer vehicle incurring more debt. Rather than creating an incentive to avoid debt, the Ransom decision encourages those considering a Chapter 13 bankruptcy to incur more debt prior to filing. The Ransom decision turns logic on its head by punishing a debtor for avoiding a car payment obligation because it will prevent a debtor from claiming an ownership expense.
Because the allowable expenses in a Chapter 13 budget are rather modest, the Ransom decision also denies an important emergency fund to those who have reduced their expenses by driving a less expensive vehicle and avoided incurring an expensive car payment. This emergency fund could be used when a debtor’s car breaks down and needs repairs, they are temporarily between jobs or have sudden unanticipated medical expenses. It is too early to tell whether the denial of a vehicle ownership expense will lead to more Chapter 13 plans not being completed, but there is reason for concern.
We offer a free initial consultation. Contact Kansas City bankruptcy attorney Weston R. Moore personally about your matter by calling our office at (913) 782-7075 or using our convenient contact form.
Weston R. Moore, Attorney
13401 S. Mur Len Road, Suite 100
Olathe, KS 66062