How a cheap car payment can help you on the bankruptcy means test and your Chapter 13 budget.
The 2005 Bankruptcy law, known BAPCPA or sometimes BARF, was designed to make bankruptcy more painful for families making over the average income in each state.
A cheap car payment will help this family with the bankruptcy means test
The bankruptcy means test determines whether families making over that average income can be approved for Chapter 7. And if not Chapter 7 eligible, the means test determines their Chapter 13 budget for five years..
The bankruptcy means test formula is arbitrary. It was designed to be arbitrary. Congress, and the credit card companies, thought that bankruptcy judges were too easy.
Most families around here who are making too much to get approved for Chapter 7 end up failing at Chapter 13. Without careful planning, the bankruptcy means test will put you into a Chapter 13 budget that you are not able to afford.
How Getting A Cheap Car Payment Helps with the Bankrutpcy Means Test and Chapter 13 Payment
Here’s one example where careful Chapter 13 planning can make all the difference.
John and Tanya is live Woodbridge in a house they own with three children. John is stationed at Joint Base Andrews; Tanya is home with the kids, one child needing special attention.
Because they are trying to handle their debts, they have gotten by as a one-car family. And John’s car has 110,000 miles on it.
If John and Tanya go into Chapter 13 now, the means test gives them a Chapter 13 budget of $629 for the car payment (regardless of what the payment really is) and $294 for gasoline, car repair and car insurance. It will be impossible for John to hold his car operating expenses, gas, repairs, insurance, below $221 for five years on a car that already has 110,000 miles. When John needs to repair his car, they have to cut the food budget.
Fortunately, John and Tonya talk to me before their credit is totally shot. So I can point out to them that they are much more likely to survive Chapter 13 for five years, if they go out and get a low payment second car now.
Tanya buys a used Nissan Versa, sale price $13,500, at 7% for five years. Her payment is $345.00 monthly. That $227 payment counts as $629 on the means test. That frees up for the family budget $284 a month. (That’s $629 means test ownership allowance, minus the $227 actual payment.) So $284 can go to pay things like sports for the kids, which aren’t in the Chapter 13 budget.
And they get a second $294 monthly for operating expenses. John drives the new Nissan Versa to work. And Tanya takes the older car for errands around town. Now, they can hold their gasoline, repair and insurance below the new total operating allowance of $588.
(I should note here that it would be illegal for me to tell John and Tonya to go out and finance a car. But it was legal for me to tell them that it’s legal for them to do it.)
Conclusion
People say that bankruptcy should be a last resort. But you don’t want it to be a last minute, last resort. Careful Chapter 13 planning is very important for getting the best result. A cheap car payment can be part of that planning.