If you have a car, the means test in bankruptcy allows you to deduct a certain amount of expenses related to operating and owning a vehicle. As a result, owning a car can help you qualify for Chapter 7 bankruptcy or reduce the amount you must pay unsecured creditors in Chapter 13. The amount of your deduction depends on:
On the means test, you are allowed a standard operating expense deduction for up to two cars (a single debtor is normally allowed a deduction for only one vehicle). The operating expense allowance includes costs associated with driving a car such as gas, maintenance, registration, and insurance. You are allowed use this deduction whether you have a monthly car payment or not.
However, the amount of your deduction depends on the local standard allowance where you live. This means that you are only allowed to deduct the standard allowance for your area, not the amount of your actual operating expenses.
If you lease or make monthly loan payments on your car, the means test allows you to deduct an ownership expense in addition to your operating expense allowance. The ownership expense is designed to take into account your monthly car payment obligations.
The current national standard ownership expense allowance is $517 a month per car (up to two cars) no matter where you live. However, this figure is updated periodically. The benefit of having a car loan is that you are allowed to deduct the standard national allowance or your average monthly car payment, whichever is higher. Here’s how it works.
When calculating your monthly car payment, the means test averages the amount of your total car loan obligation over the next 60 months. This means that if your car will be paid off in less than five years, your 60-month average car payment on the means test will be less than your actual payment amount.
If your 60-month average is greater than the national standard, you get to deduct the higher amount on the means test. However, if your average car payment is below the national standard, you can still deduct the amount of the standard allowance (currently $517 per car).
Example. Dorothy has a $600 a month car payment. Her car loan will not be paid off for another 70 months. Since Dorothy will be required to pay $600 a month for the next 60 months, her 60-month average payment is still $600 and she can deduct this amount on the means test. This gives her an additional $83 deduction over the standard $517 allowance. However, if her loan was going to be paid off in 40 months, her 60-month average payment would now be $400 per month (her total remaining obligation of $24,000 divided by 60). In that case, she could not deduct $600 but would still be allowed the $517 standard ownership expense on the means test.
If you own your car free and clear, you may have a harder time passing the Chapter 7 bankruptcy means test than someone with a car loan. Learn more about that in our article on Means Test Expenses without a Car Loan.
If your income is above your state’s median for a similar household, you must use your expenses to pass the means test and qualify for Chapter 7 bankruptcy. If you have a car payment, you get to deduct at least an additional $517 on the means test to help you pass. If your 60-month average car payment is greater than the standard national allowance, you can benefit even more by deducting your actual expense.
(To learn more how the means test controls your ability to qualify for Chapter 7 bankruptcy, see our Chapter 7 Means Test area.)
The amount you are required to pay unsecured creditors in your Chapter 13 depends partly on the amount of your monthly disposable income calculated by the means test. Having car ownership expenses can help you reduce your disposable income significantly. As a result, if you own a car and have a loan payment, you will likely end up paying less to your unsecured creditors through your Chapter 13 repayment plan.
(To learn more, see the articles in The Chapter 13 Repayment Plan.)