Many people consider bankruptcy because they fall behind on secured debt payments. For instance, many clients are several months behind on their car payments and want to walk-away from their overpriced vehicles. In chapter 7 bankruptcy we can do that, and the ability to just surrender the car and wipe the slate clean is a tremendous advantage of chapter 7 bankruptcy. However, we sometimes run into problems when a client makes a little too much money. You see, in order to qualify for chapter 7 bankruptcy the client must have annualized current monthly income less than the state median income for a household of their size. If they make more than that they must pass the means test before they can file chapter 7 bankruptcy. The means test allows clients to deduct certain expenses in an effort to bring their income below a certain threshold and thereby qualify for chapter 7 bankruptcy. If the client has enough of these qualifying expenses and is successful in bringing their income below that threshold they can file chapter 7 bankruptcy; if they can’t they must file chapter 13 bankruptcy.
Since so many clients want to walk away from their car, the questions arises as to whether they can deduct car payments on the means test when they are giving up the car in bankruptcy.
In the 9th Circuit we are allowed to deduct car payments on the means test even though we are surrendering the car in bankruptcy. More generally, we are allowed to deduct secured debt payments on the means test when the collateral will be surrendered in bankruptcy. However, this rule changes when we are calculating disposable income in chapter 13 bankruptcy. The Ninth Circuit BAP decided that we cannot deduct secured debt payments on collateral we intend to surrender in chapter 13 bankruptcy when calculating disposable income; perhaps because it is a calculation of what the client can afford going into the future after filing, not a mechanical calculation that ends on the petition date and looks-back 6 months as in the chapter 7 bankruptcy means test.
If you have questions about bankruptcy contact bankruptcy attorney Adam Garcia. You can get answers to your questions during a free phone consultation with a knowledgeable attorney.