As discussed in our posts on the Chapter 13 Plan and Disposable Income to be paid in the Plan, we are able to include in our budget the “ownership expenses” of vehicles, which basically means the monthly payments due on the car loan or lease (and not “Transportation Expenses” such as gas and maintenance).  In fact, in an unusual U.S. Supreme Court case dealing with a consumer Bankruptcy case, the High Court said the allowable expense was for “the costs of a car loan or lease, and nothing more,” and that a debtor who owns a car free and clear of any car loan or lease cannot claim this category of expense.  That means a client without a car loan may pay more to the Chapter 13 Trustee than the same person who has a lease or loan, but since the money will go to the lender it is often a wash in the bottom line.  Most of us finance vehicles when we purchase them, and the lender provides the money for the purchase and takes a “purchase money security interest” (“PMSI”) in the vehicle.  Does it make a difference in the Chapter 13 budget and plan if a person owned a vehicle free and clear, but later got a loan and gave the lender a security interest in the vehicle (a “non-purchase money security interest”).  In some states and courts, yes it does.

The Supreme Court did not discuss the issue of PMSI vs. non-PMSI in the context of a Chapter 13 budget, so that has been left to the individual Bankruptcy Courts to decide.  Most courts (including a recent court in Georgia) have held that the ownership deduction may be taken only for leases or loans taken out to purchase the car (or PMSI loans).  The reasoning for this outcome is that the language in the statute (which incorporates the IRS’ definition of vehicle ownership expenses) and the (alleged) “concern” that debtors might be encouraged to take out small loans before their Bankruptcy filing to take advantage of the larger ownership expense allowed in their Chapter 13 budget.

Does this make sense for most people who have car loans? No, it does not.  Most people take out car loans (at or after purchase) because they do not have the cash available and need the loan.  Any concern for “abuse” or playing the system  could be dealt with in other ways.  These rulings could very well make it difficult for some people to file a Chapter 13 and pay creditors.  However, in many districts this is the law and it is another reason that people facing financial problems should see a Bankruptcy lawyer well before the last minute, and get good advice on what to do and what not to do before filing a case.  They will know how courts in your state and district have ruled on this and other “grey areas” in the law.