Significant Negative Impact to Disposable Income Expected for Tampa, Florida Debtors under a New U.S. Supreme Court Ruling that a Debtor Cannot Claim an Ownership Expense for a Free and Clear Vehicle

A January 11, 2011 opinion by the U.S. Supreme Court is expected to drastically increase potential disposable income in Chapter 7 and 13 bankruptcy cases in Tampa, Florida. This may cause someone who previously qualified for a Chapter 7 bankruptcy not to qualify, or to increase the Chapter 13 plan payment by $500.

You see prior to Ransom v. FIA Card Services, N.A., our local (often considered debtor friendly) Tampa Division would generally allow a $496 ownership credit toward a vehicle (two credits were allowed if debtors were married or had reason for an additional vehicle). This $496 credit would be allowed even if the car payment was less than $496 or if there was no car payment and it was owned free and clear. A debtor only needed to own or lease a vehicle to claim the ownership credit. A separate credit is used for vehicle operating expenses. The reasoning in the Tampa Bay area was in part if the debtor was driving an older paid off vehicle, at some point during a 3-5 year plan the debtor would have to purchase a replacement vehicle. Allowing the credit would permit the debtor to both save some money for the down payment as well as afford the payment when the replacement vehicle was purchased.

Following the 8-1 decision in Ransom, our local Chapter 13 Trustees and Judges can no longer allow a debtor to reduce disposable monthly income (DMI) by claiming a vehicle ownership expense when the debtor has no associated loan or lease payment for the vehicle. In some other areas of Florida or elsewhere around the country, debtors already were not allowed to claim the expense, so this won’t have any effect on them. But here in Tampa, this is a major disappointment.

Expect an uptick in Chapter 13 bankruptcy cases as opposed to Chapter 7 cases being filed, and more people potentially being dismissed in a Chapter 13 when higher plan payments cause inequity in the debtor’s true monthly balance sheet.

On the other hand, it could be good news for used car dealers who might see an increase in business if debtor attorneys start to advise debtors to get a loan, any loan, on that car before they file. I can see the billboard now: Need a bankruptcy bailout? Buy our “clunker” and get $500 off your plan payment.

For more information about filing a bankruptcy, please see our website at Arkovich Law