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.

There are a some pitfalls with this plan. To name a few, the debtor must be prepared to explain what he did with the money borrowed on the car. Using the borrowed money to pay  his bankruptcy attorney, or pay priority debts such as tax debt, may be acceptable. Second, bankruptcy attorneys are not supposed to encourage their clients to incur debt prior to filing bankruptcy. Issues aside, my client’s suggestion is an inventive way for some clients with free and clear cars  to improve their means test results.