Bankruptcy Car Ownership-Cost Deduction Limited by U.S. Supreme Court

On January 11, 2011 in Ransom v. FIA Card Services, MBNA, America Bank, U.S. (2011), the United States Supreme Court held that in a Chapter 13 bankruptcy, a debtor cannot use the car-ownership deduction to deduct ownership costs if the debtor does not make car loan or lease payments. (In a Chapter 13 bankruptcy, the car ownership-cost deduction is factored into a calculation of the debtor's disposable income, which in turn determines the amount that the debtor must repay creditors.)

Although the Ransom case deals with Chapter 13 bankruptcies, it is extremely likely that courts will apply the same reasoning to the car-ownership deduction in Chapter 7 bankruptcies for means test calculations. This would mean that if you are not actually making car lease or loan payments, you cannot use the car-ownership deduction for purposes of the means test. Previously, the courts were split as to whether you could use this deduction if you did not actually make car payments.