A recent US Supreme Court Ruling in the Ransom case, showed that 8 of our 9 Supreme Court Judges lack the common financial sense to reward good financial planning through our bankruptcy laws. Specifically, the United States Supreme Court has ruled 8-1 that the vehicle ownership expenses allowed under bankruptcy laws are only available to debtors who have a vehicle on which they are making payments.
In other words, if a debtor has wisely paid off his vehicle, and has no present payments, such a debtor is first penalized in that any equity above $5,000.00 in the vehicle must be turned over to the Trustee to be paid out to the creditors. This new case further penalizes such a debtor, preventing him from claiming vehicle ownership expenses, as he is not making a monthly debts payment. This decreases the debtors expenses, and in a Chapter 13 case this has the effect of increasing the amount that must be paid each month into the plan (and paid out to the creditors).
Any person who has ever paid off a car, understands that an older paid off car is not necessarily free of additional costs. Older cars require more maintenance. Older cars will require more repairs. However, no credit is given for this reality. Justice Scalia, the lone hold out in the 8-1 opinion, pointed out that a debtor could go out and purchase a $50 car, and so long as he put it on payments (such as $1.00 a month for 50 months), the debtor would be able to take the full allotment for vehicle expenses which significantly exceeds the $1.00 per month to be paid for the vehicle.
Accordingly, while wise financial planning would encourage bankrupt debtors to be frugal and to make the car they have last a few more years, wise bankruptcy planning may now often encourage a bankrupt debtor to go out and purchase a new vehicle shortly before filing for bankruptcy and by so doing reduce what he is required under the law to pay out to his creditors.
Each case must be analyzed separately and needs to be based upon the financial factors of each individual person. If you are contemplating bankruptcy, do not necessarily go out and purchase a new vehicle just yet, but I would encourage you to come and meet with a bankruptcy attorney at McGuire Gardner, PLLC (Call 800 899 2730) for your free initial consumer bankruptcy consultation. While we cannot encourage you to incur debt before filing for bankruptcy, we can discuss with you the pros and cons and the results of purchasing another vehicle or going into the bankruptcy with the vehicle you may have already paid off.
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