If you own your car free and clear, you may have a harder time passing the Chapter 7 means test than someone with a car loan. This is because the means test allows you an extra car ownership expense deduction (in addition to your operating cost allowance) if you have a car payment. Read on to learn more about the car ownership expense deduction and how it can help you pass the means test.
(Learn more about the Chapter 7 means test.)
You May Need the Car Ownership Deduction If You Have Above-Median Income
If your income is below the state median for a household of the same size, you automatically pass the means test. As a result, you don’t need to use your car ownership expense deduction to qualify for Chapter 7 bankruptcy. However, if you have above-median income, you have to disclose and deduct your expenses on the means test. (Learn if your income is above or below the state median.)
If you have enough expenses, you may be able to reduce your disposable income enough to pass the means test. This is where the car ownership expense deduction can help you qualify for Chapter 7 bankruptcy.
How Does the Car Ownership Expense Deduction Work?
You are only allowed a car ownership expense deduction if you lease or make payments on your car. If you don’t have a car loan, you can’t use it to lower your disposable income. The current national standard car ownership allowance is $517 a month per car for up to two cars. But this figure changes periodically. If you are single, you are normally only allowed a deduction for one car.
You can deduct the full standard ownership allowance even if the amount of your car payment is less than $517. However, if your 60-month average car payment is higher than $517 a month, you may use your actual car payment on the means test to increase your deduction.
Calculating Your 60-Month Average Car Payment
Just because your current car payment is higher than $517 a month doesn’t mean you can deduct it in full on the means test. When calculating your deduction, the means test uses the amount of your average car payment for the 60-month period after your bankruptcy filing. This figure is an average based on how much you will be required to pay during those 60 months.
To calculate your 60-month average, add up all the payments you will be required to make over the next five years and divide the total by 60. If your 60-month average is above $517, you can deduct the higher amount on the means test. If it is less, you are still entitled to the standard $517 car ownership deduction.
Example. Nick’s car payment is $650 per month. He still has 65 months left on his loan. Since he is required to make monthly payments of $650 for the next 60 months, his 60-month average is also $650 ($650 multiplied by 60 then divided by 60). As a result, Nick gets to deduct his actual $650 car payment on the means test and take advantage of the extra portion above the standard $517 car ownership allowance. However, if his 60-month average was below $517, he could still deduct the standard allowance amount.
Learn more about bankruptcy and the means test in Nolo's Bankruptcy Law section.