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Supreme Court Rules Bankrupt People May Not Deduct Car Costs for Cars They Own

January 13, 2011

As Riverside consumer bankruptcy attorneys, we were very interested to see a Supreme Court ruling on bankruptcy law -- specifically, the interpretation of a new rule introduced in the 2005 changes to the bankruptcy laws. As Bloomberg News reported Jan. 11, the case is also the first opinion authored by new Justice Elena Kagan. It is a dispute over whether a Nevada man in Chapter 13 bankruptcy may deduct the cost of owning and maintaining a car from the money available for his Chapter 13 repayment plan. The plain language of the statute directs bankruptcy courts to subtract a set amount of money for ownership ad use of a car. However, the debtor, Jason Ransom, owned his car outright. The Supreme Court ruled 8-1 that the deduction was not available to Ransom and other debtors without a car payment.

Ransom filed for bankruptcy in 2006 with credit card debt, including debt to Bank of America's FIA Card Services. In that bankruptcy case, he claimed the car deduction. That deduction comes from a part of the 2005 bankruptcy law that says debtors' monthly expenses "shall be the debtor's applicable monthly expenses amounts under the 'National Standards and Local Standards.'" That's a set of IRS guidelines intended to help the agency decide when to forgive tax debt due to income, and it includes a deduction for up to $471 for owning a car, without mentioning the possibility that the car could be owned outright. Ransom took the deduction and FIA objected, leading the case to the Ninth Circuit and eventually the Supreme Court. Kagan and seven colleagues agreed that Ransom didn't need the deduction. The dissenter, Justice Scalia, wrote that this was a "strained interpretation" of the law.

Our Norwalk personal bankruptcy lawyers are disappointed with this ruling. Of course, it would be nice to be able to protect more of our clients' assets from bankruptcy, regardless of whether they own a car outright or are making monthly payments. Furthermore, the car deduction can't be applied to any other expenses, so allowing debtors to keep it would not allow them to turn around and spend frivolously. But more importantly, this ruling may actually encourage abuses of the bankruptcy code. If debtors get a deduction for having a car payment but not for holding on to a paid-off car, they have an incentive to buy a new car before filing for bankruptcy. This is not the behavior that bankruptcy law seeks to incentivize in other areas. In fact, debtors can be penalized for running up large debts in anticipation of filing for bankruptcy and wiping them away.

If you're considering filing for bankruptcy to deal with huge amounts of debt, you should call Howard Law PC for help. We are Dana Point individual bankruptcy attorneys with extensive experience helping clients minimize the impact of bankruptcy on their long-term financial lives. Many people file for bankruptcy as a last-ditch solution because they're afraid bankruptcy will leave them very poor and unable to improve their situations. In fact, bankruptcy is a difficult but rewarding opportunity to start over. It also leaves you with the tools you need to take care of yourself and your family on a day-to-day basis. And because bankruptcy clears away debts that might otherwise hold you back, it can actually allow filers to recover faster than they would have without that opportunity.

Howard Law offers free, confidential consultations to all potential clients. If you think you might be a candidate for bankruptcy, you're invited to call us to discuss your financial situation and goals in more detail. You can reach us toll-free at 1-800-872-5925 or send us a message through the Internet.