The Florida Bankruptcy Law Blog

Improving Means Test Results By Incurring Car Debt

When a debtor calculates a Chapter 7 means test analysis he is entitled to deduct from income transportation expenses associated with ownership of a car. All Florida debtors can deduct from income a general transportation expense which is approximately $250. There is another deduction associated with the expense of owning a car known as the “ownership expense.” The ownership expense is calculated using the debtor’s car payment and a fixed allowance of about $500. Based upon a recent court ruling, debtors who own a car free and clear of any liens are not eligible to take any ownership expense despite the obvious costs associated with owning a car in Florida. The car ownership deduction is limited to people with car debt.

This past week I provided legal services to a woman who is a bankruptcy paralegal in a high-volume bankruptcy office located in Illinois. We discussed how her office handles car expenses in the means test.  The attorney she works for recommends that prospective debtors who own cars outright get a very small car loan in order that the debtor qualifies for the car ownership allowance.

In Florida, for example, debtors get a $1,000 base car exemption. Most debtors today also qualify for a $4,000 wildcard exemption which can be applied to protect car equity. Assume a debtor in Florida owned outright a car worth less than his applicable exemption limit. Using the advice provided by the Illinois attorney, the debtor would get a very small car loan prior to filing bankruptcy, if and as necessary, to help him qualify for the means test. The small loan would not significantly affect his monthly household budget.  If the debtor’s car was worth more than the allowable exemption the trustee would demand payment of non-exempt equity.

U.S. Supreme Court Makes It More Difficult To Pass Means Test By Reducing Car Allowances

The U.S. Supreme Court issued a decision on January 11, 2011, making it more difficult for debtors to pass the Chapter 7 means test. The means test includes two car related deductions from income. Debtor's may be eligible to deduct from income an allowance for car-operating costs and a separate allowance for car-ownership costs. The amount of the debtor's allowances are based upon published table of National and Local Standard as well as their actual expenses.

The Supreme Court case involved the means test filed by a debtor who owned a car free and clear of any debt and liens. The issue in this case was whether such debtor can claim the car-ownership allowance when the debtor has no monthly car payment and his only car expenses are those related to car operations. 

Unemployed Debtors And Chapter 7 Means Test

People who become recently unemployed can usually file chapter 7 bankruptcy. I have written previously that people who technically fail the means test may still be permitted to file bankruptcy if unemployed under “special circumstances” provision of the means test law. The length of the debtor’s unemployment prior to filing can make a big difference.

I spoke to a prospective bankruptcy debtor who had been making $8,000 per month in a two-person household. She could not pass the means test at that salary level. Assume the debtor lost his job six months ago. In that case the debtor could file bankruptcy whatever his prior salary because the means test only looks back six months. If that debtor found a new job prior to filing where the debtor made $8,000 or even more money the debtor could still file Chapter 7 because he likely would not have made enough money from the new job, whatever the salary, to raise his six month’s income above median income.

Confusing Income : Taxable Income Is Different From Means Test Income

Whether or not you qualify to file Chapter 7 depends on your income level relative to applicable median income where you live. The term "income" has special meaning in bankruptcy law, and many people reach incorrect conclusions about their bankruptcy eligibility because they do not understand how bankruptcy defines their "income."

A couple made an appointment earlier this week to discuss asset protection as an alternative to bankruptcy. The couple had over $150,000 of unsecured debts. The wife was unemployed and the husband worked in sales. They told me at the beginning of their story that they were ineligible to file bankruptcy because the husband made too much money. They wanted to know what creditors would do to collect money and if they could protect their salary and their few remaining assets.

After listening to their description of their situation I pressed them to explain to me in more detail why they were ineligible to file Chapter 7 bankruptcy. They explained that the husband’s 2009 income was $100,000 and that they knew this income level was too high to qualify their three person household for Chapter 7 bankruptcy. It turns out that the husband earned most of his taxable income in the first half of 2009. He lost his job in October, 2009. He just found a new job this February that paid a base salary of $50,000 plus commissions. He expected that 2010 commissions at his new job would match his 2009 salary by the end of this year so he was still "too rich" to file Chapter 7 bankruptcy. I told the couple that in my opinion they were in fact eligible to file Chapter 7 bankruptcy based on their income history.