May 4

Why You Cannot Use Vehicle Ownership Costs To Qualify For Bankruptcy When You Have Paid Off Your Cars

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Opening disclaimers! This blog simply contains my thoughts and ruminations on certain subjects. They are thoughts in general and are not intended to be given or taken as legal advice. I do not give legal advice until I have had a chance to get a good handle on the facts of a case and have been hired. So if anything in this entry piques your interest or seems to apply to your situation follow it up by consulting an attorney. I am not giving legal advice here.

In 2005 Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The stated purpose of the act was to ensure that the bankruptcy code was fair to both debtors and creditors and to prevent unscrupulous attorneys from taking advantage of creditors in representing their debtor clients. Some people, believing that the 2005 act being written by lawyers and lobbyists, representing banks and credit companies, take the fairness purpose stated in the act with a big “yeah, right!” Whether it is true or not really does not matter. For now it, is what we have to deal with. One of the fairness criteria that developed out of the act to determine whether a debtor qualified for Chapter 7 bankruptcy or had to seek a Chapter 13 was something called the means test. It is basically an analysis of the creditors last six months of income to see if that income is above or below the average income for that size of family in the state where the debtor lives. If the income exceeds the average then there is a presumption that the debtor is abusing the bankruptcy system and can afford to pay back some if not all of the debt. If the debtor’s income exceeds the average income for his classification in his state, then the debtor’s actual living expenses are not taken into account, but standards developed by the Internal Revenue Service are used to determine what the debtor really needs to live on. In going through the means test the cost of owning a vehicle is one of the items that can be used to determine whether the debtor’s reasonable expenses qualify him for bankruptcy. The limit for this expense is about $470 because that is the average payment across the USA for an automobile lease or loan payment. This is where many people get sideways with the bankruptcy Trustee in their case. They get confused in thinking that the cost of ownership is the same thing as the cost of operating a vehicle. They do not realize that if they have paid for their car, they have no cost of ownership so they cannot use this expense in their means test analysis. If they own the vehicle outright they have only operating costs which, according to the IRS should be about $390 per month for all purposes; gasoline, oil, repairs, insurance, registration etc. And it does not matter if your vehicle is a SUV you need to haul your 5 kids and their friends to school and daycare every day, or that the only job you could find in the lousy economy that caused you to have to file bankruptcy in the first place is a 160 mile daily round trip commute. So if you happen to be one of the intrepid souls who desires to tread into the bankruptcy arena on your own, this is one of the little traps you have to keep in mind, there is a difference in vehicle ownership costs and operating costs. If you have paid for your vehicle you have no ownership costs. Your operating costs are predetermined no matter what or how much you drive.

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