If you file for bankruptcy, you must take and pass the means test in order to qualify for Chapter 7 bankruptcy. In Chapter 13 bankruptcy, the means test helps determine the amount of your monthly plan payment. In the means test you deduct certain expenses from your income -- the remaining amount determines if you pass or not.
The means test allows you to deduct certain amounts related to owning and operating a motor vehicle. If you incur expenses for driving a car or other motor vehicle, you are entitled to a car operation deduction on the means test. In addition, the means test has a car ownership deduction. But you can only claim the car ownership deduction if you make monthly loan or lease payments on a vehicle. Read on to learn more about how the car ownership deduction works.
For more information on how the means test works and for other deductions that can help you pass the means test, see our Chapter 7 Means Test topic area.
Car Operation Deduction v. Car Ownership Deduction
The car operation deduction takes into account expenses related to operating a motor vehicle. If you pay for gas, maintenance, or other related expenses for a vehicle, you can claim the car operation deduction on the means test (regardless of whether you own the car free and clear). The amount you can deduct depends on average transportation costs in your area determined by IRS local and regional standards.
In addition to the car operation deduction, you can also claim a car ownership deduction on the means test if you make monthly loan or lease payments on your vehicle (discussed below).
To find the most up-to-date car operation and car ownership deduction amounts, visit the U.S. Trustee’s website at www.justice.gov/ust and select “Means Testing Information.”
Who Can Take Advantage of the Car Ownership Deduction?
The United States Supreme Court has recently ruled that the car ownership deduction is only available to debtors who make loan or lease payments on their vehicles. If you own your car free and clear, you can’t claim the car ownership deduction on the means test. In many cases, this means that debtors who have leased or financed their cars have a better chance of passing the means test than debtors with similar income and expenses who own their cars free and clear.
How Does the Car Ownership Deduction Work?
If you make monthly loan or lease payments, you are currently entitled to a car ownership deduction of $517 (this figure is updated periodically) on the means test. If your loan payment is less than $517 a month, you can still claim the entire car ownership deduction. If your car payment is more than $517 per month, you may be able to deduct your actual payment amount on the means test. But first, you must calculate your average monthly payment for the next 60 months (five years). Here’s how it works.
How to Calculate Your Car Ownership Deduction
Just because your current car payment is greater than the standard car ownership deduction doesn’t mean that you can automatically deduct your full payment on the means test. When determining whether your car payment exceeds the ownership deduction, you must calculate the number of payments you are required to make over the next five years and divide the total by 60 to arrive at an average monthly payment figure. If your 60-month average payment exceeds the $517 ownership deduction, you are entitled to deduct the higher amount on the means test.
Example. Janet recently financed a car with a six-year loan that has monthly payments of $600. At the time she files for bankruptcy, Janet is required to make 70 more payments under the contract. Since Janet has to make payments for the next 60 months, her average monthly loan payment is $600 (same as her current payment). This means that she is entitled to claim her entire car payment amount on the means test because it’s higher than the $517 car ownership deduction. If Janet only had 40 more payments, her average monthly loan payment on the means test would be $400 (multiplying 40 payments of $600 gives us $24,000, divided by 60). In that case, she can still use the $517 car ownership deduction but she can’t deduct her full $600 car payment.