I can share a secret, just between us.
Bankruptcy “reform” in 2005 tried in a number of ways to discredit and gag lawyers from helping debtors.
One of those additions to the Bankruptcy Code prohibits lawyers from advising those filing bankruptcy to incur new debt. The statute makes no distinction about the kind of debt involved or the purpose served by the loan.
Lawyers are not to advise incurring new debt.
But I’m not your lawyer, so I can tell you what you need to know about cars. Or really about car loans, since I know nothing about cars beyond that.
Cars and the means test
Car loans are the most frequently found secured debt. And payments on debts secured by cars are deductible on the means test introduced by bankruptcy “reform”.
The IRS standards, on which the means test is based, allowed a debtor deduct a certain amount per month to acquire a car. Courts were split on whether you had to have a car payment to get the ownership allowance.
Then the Supreme Court in Ransom said the debtor with a paid for car gets no ownership deduction. But if you have some remaining payments on a car loan, you get to claim the full car ownership deduction of $517 here in California on the means test.
More deductions on the means test, more likely you qualify for Chapter 7, or for a very cheap Chapter 13.
The means test also has a provision for the expenses of operating a car: gas, insurance, registration and maintenance.
For a time, the debtor with a car with no loan but lots of miles could claim an extra $200/month for the expense of maintaining an older car.
That older car operation allowance was not found in the bankruptcy statute but in the IRS Manual. Since many of the standard expense allowances were based on IRS standards, courts often used the manual’s allowance for the extra maintenance of an old car to increase the debtor’s vehicle operation allowance.
IRS manual not part of bankruptcy law
The $200/month clunker adder the the operation deduction was disallowed by the 9th Circuit BAP in April 2014. The three judge panel held that bankruptcy law does not incorporate all of the provisions of the IRS Manual, just because it uses some part of the IRS standards.
That, I suppose, is the good news. Some bankruptcy courts have been willing to swallow great hunks of the manual just because Congress used the collection standards in crafting the means test, usually to the debtor’s disadvantage.
The bad news for those needing bankruptcy relief is that you are expected to keep an old car running for no more than it takes to keep a new car running. Which causes you to ask what planet do Congressmen live on, but that’s another story.
The $200 clunker allowance is now seen, at least in the 9th Circuit, as money that you should be paying your creditors.
Get new wheels
Meet with a bankruptcy lawyer and that lawyer may not be bold enought to say what I can: Get a replacement car BEFORE you file bankruptcy.
Go incur some debt to get reliable transportation.
If your income is above the median for families in your state, you need to pass the means test to file Chapter 7. The monthly payment on a new car is deductible on the means test.
If your car is older, it may not last the five year duration of a Chapter 13. If you had to replace your current car during the Chapter 13, the terms are not usually advantageous. But my clients have had good success in financing a replacement car before they file bankruptcy.
If a car is new, or newer than what you currently drive, there’s a better chance you can actually operate it on the IRS allowance for vehicle operation. Reliable transportation will get you to work and get you along the road to financial recovery.
The consequence of failing the means test is that you must file Chapter 13 for bankruptcy relief. Chapter 13 may or may not be a good fit for you. But we all like to have choices.
Just be scrupulous that you tell the truth on the loan application. Don’t sign it without reading it carefully.
The debt incurred to buy a newer car will survive the Chapter 7 discharge, since to keep the car, you’d have to reaffirm the car loan. This isn’t a scheme for a free car.
It’s a dose of reality in a bankruptcy world sometimes divorced from reality.
And I can shout this from the roof tops, because I’m not your lawyer, I’m just a bankruptcy blogger and the bankruptcy gag order doesn’t apply here.
Means test meaningless in Bay Area
What you must tell your bankruptcy lawyer
Keep your car through bankruptcy
Image courtesy of Flickr and Coolio-Claire.