Cars and bankruptcy

The recent Supreme Court decision in the Ransom case got a lot of bankruptcy academics interested again in the subject of how the Bankruptcy Code treats debtors with automobiles and trucks (which is pretty much all of them). It also may have some debtors nervous about how they (and their rides) will be treated if they file a bankruptcy case.

For the most part, there is no reason to worry. For the most part.

Rather than being about the ability to keep a car after a bankruptcy case, Ransom is really about means-testing, and who will qualify for Chapter 7 straight discharges, as opposed to Chapter 13 repayment plans.

As such, the case has no influence whatsoever on debtors whose incomes are under the state average for their household size. Repeat: if your income is under the state median, there has been no change in the law to you.

Debtors with incomes above the state average, however, are still allowed to qualify for Chapter 7, by taking a series of deductions against their income — kind of like the tax return process. (Insert groans here)! One of those deductions is for vehicles. Enter the Supreme Court.

What the Court said was that only debtors who actually have car loan payments, or lease payments, will be allowed to take the deduction for “vehicle ownership expense.” Debtors who own their cars outright will no longer be allowed this particular deduction.

So the universe of people who are affected by the case is essentially debtors with above average incomes and one or two cars they own outright with no loans against them.

But wait! Is it possible that even these folks may be able to skirt the Supreme Court ruling? It turns out it may be so. The Ransom case itself was a Chapter 13 case, and there is at least one law professor out there who has fashioned an argument that it therefore does not apply to Chapter 7 means testing at all.

Aggressive debtors in Massachusetts or New Hampshire might want to be one of the first to test this theory out in court. Until we get a ruling from a local judge on the issue, it looks like the situation will still be somewhat uncertain. But until then, the vast majority of bankruptcy debtors can safely drive on!


By Doug Beaton

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