The Impact of Ransom v. FIA Card Services on the Bankruptcy “Means Test”

The Bankruptcy Code uses a statutory formula known as the “means test” to determine whether a debtor qualifies for a Chapter 7 or Chapter 13 bankruptcy case. Simply put, the means test compares the debtor’s household income averaged over the past six months with the median income of the state in which they reside.  If the debtor’s income is higher than the median, there is a presumption that the debtor has the means to pay creditors and a chapter 7 is inappropriate.  The debtor is forced into a chapter 13.  The means test is also used, in some districts, to determine the amount of the debtor’s chapter 13 payment.

In determining the six month average income, the debtor is permitted to take certain deductions.  The law says that those deductions may be calculated using the IRS standard deductions that the IRS uses to calculate debtor income when making payment arrangements or forgiving taxes.  One of those deductions regards expense related to motor vehicles.  That amount can include the amount of a car payment.

In the recent Supreme Court case Ransom v. FIA Card Services, the question before the Court was whether the debtor could claim a car payment deduction for a car that he owned free of any debt. The Court held that the debtor could not take a deduction for a payment that he did not have: “A debtor who does not make loan or lease payments may not take the car-ownership deduction.” A person who owns a car free of debt is entitled to the “Operating Costs” deduction for all driving-related expenses. However, a person may not claim the “Ownership Costs” deduction because that allowance is for the separate costs of a car loan or lease.

This holding has several implications for debtors. First, debtors may now be forced to make larger chapter 13 payments to unsecured creditors.  Second, the debtor may be forced into a chapter 13 instead of a chapter 7. There is also currently a case before the Court to determine whether the means test is used to determine the chapter 13 payment or whether a debtor may use the difference between the amounts on Schedules I and J (income and expenses).  That case, together with Ransom, will have a big impact on a debtor's ability to file a chapter 7 or to afford the payments of a chapter 13.

Brad Russell

Associate Attorney

Tim Hatton & Associates
104 ½ Public Square
Lebanon, Tennessee 37087
Tel.: 615-453-9934
Fax: 615-472-7868