Supreme Court Decision: Not All Consumers can use Car Ownership Deduction

The means test is a test required under the new bankruptcy law to determine a debtor's eligibility to file for bankruptcy under Chapter 7 of the Bankruptcy Code. If your income is greater than the median income for your state of residence and family size then you fail part A of the means test and must refer to part B.

In part B of the means test, you must take into consideration certain expenses as defined by the Bankruptcy Code and IRS relating to allowable housing expenses, utility expenses and other deductions, such as regular charitable donations (up to 15% of your income), school expenses, payments on 401(k)/IRA loans, and health insurance. If you are filing for Chapter 13 Bankruptcy, part B of the means test is also used to determine the amount of money left over in your budget for payment on a Chapter 13 Plan.

In either instance, there are two allowable deductions for owning a car: the "ownership" deduction and the "operating" deduction. If you own a car you can take the operating deduction in which the IRS standard estimates your cost for use of your car. If you owe money on your car then you can take the amount of your loan as an "ownership" deduction as well, and the court also provides an IRS standard estimate for the "ownership" deduction. But what if you don't owe any money on your car, or your lien expense is less than the standard "ownership" deduction?

This question was answered differently by a number of appeals courts in the U.S., and on Tuesday, January 11, 2011, the U.S. Supreme Court resolved the inconsistency by upholding a 9th Circuit decision on this issue. The Supreme Court in Ransom v. Fia Card Services (Judge Kagan's first decision on the high court), decided that a consumer who does not have a lien on their car in a Chapter 13 case cannot use the "ownership" deduction to reduce their payment. Although, not addressed directly by the Court, this decision would also presumably apply to use of this deduction to meet the Chapter 7 Part B Means Test.

The Court rejected the debtor's argument that this application of the law would result in unfair policies favoring people who owed money on their car (i.e. bought newer cars before filing bankruptcy), and based their decision primarily on the Court's interpretation of the use of the word "applicable" in the statute. Judge Scalia in his dissent points out the absurdity of this reading and the confusion it may create. Specifically, this ruling does not clarify whether the "ownership" deduction can be taken in whole when the lien payment is less. Although meeting the standard of being an "applicable" deduction, this result would not really make sense in light of the court's ruling.

Regardless of whether the ruling is completely consistent, it is now the law, and for Chapter 13 consumers that have paid off cars, this means they will be making higher payments to their creditors.

New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.

On Friday, January 7, 2011, the Massachusetts Governor signed a bill amending (and significantly increasing) the personal property of Massachusetts residents that is protected from seizure by creditors. These "exempt" assets cannot be reached by your creditors in an execution or sold in a bankruptcy proceeding. The changes go into affect on April 7, 2011.

More specifically in bankruptcy you can choose between the Federal exemptions and State Exemptions. The increases in the personal property state exemptions may have a significant impact on which option you choose. Below we have provided a comparison between the old and new exemptions along with our comments:

OLD Massachusetts Exemptions - Necessary wearing apparel, beds, bedding, and 1 heating unit.
NEW Massachusetts Exemptions - Necessary wearing apparel, beds, bedding, 1 heating unit, 1 stove, 1 refrigerator, 1 freezer, and 1 hot water heater.
Comments - It would appear that the Massachusetts' exemptions want you to list “fixtures” that would otherwise be included in the equity of your primary residence. Normally, we do not list fixture appliances separately, and the trustee has never taken issue with it. However, in order to maximize the exemptions you can take, you might consider listing these items and exempting them specifically.

OLD - The amount each month, not exceeding $75, reasonably necessary to pay for fuel, heat, water, hot water and light.
NEW - The amount each month, not exceeding $500, reasonably necessary to pay for fuel, heat, refrigeration, water, hot water and light.
Comments - An appropriate recognition of the increase in these expenses (at least to some extent).

OLD - Household furniture not exceeding $3,000.
NEW - Household furniture not exceeding $15,000.
Comments -  Brings household goods and furnishings on par with the federal exemptions – a bit more generous, actually.

OLD - The bibles, school books and library, not exceeding $200.
NEW - The bibles, school books and library, not exceeding $500.
Comments - Not usually an issue, but maybe our clients are just not big readers.

OLD - 2 cows, 12 sheep, 2 swine and 4 tons of hay.
NEW - 2 cows, 12 sheep, 2 swine and 4 tons of hay.
Comments - No change. Good for farmers. Nobody else cares.

OLD - Tools for trade or business, not exceeding $500.
NEW - Tools for trade or business, not exceeding $5000.
Comments - A major and reasonable increase for tradesman, a more common issue then protecting your cows and swine.

OLD - Materials and stock for trade or business, not exceeding $500.
NEW - Materials and stock for trade or business, not exceeding $5000.
Comments - Ditto.

OLD - Provisions necessary for debtor or family, not exceeding $300.
NEW - Provisions necessary for debtor or family, not exceeding $600.
Comments - Normally, we do not list food on hand, and the trustee has never taken issue with this either. This suggests a greater level of detail may be expected in the future.

OLD - One pew in a house of public worship.
NEW - One pew in a house of public worship.
Comments - No change. Also hasn't been much of an issue for our past clients, maybe for the same reason they haven't been exempting their bibles.

OLD - Boats, fishing tackle and nets of fishermen actually used in their business, not exceeding $500.
NEW - Boats, fishing tackle and nets of fishermen actually used in their business, not exceeding $1,500.
Comments - Even tripling this deduction is not going to leave room for much of a boat. Looks like fisherman will not be left as well off as farmers after a bankruptcy.

OLD - The uniform of an officer or soldier in the militia and the arms and accoutrements required by law to be kept by him.
NEW - The uniform of an officer or soldier in the militia and the arms and accoutrements required by law to be kept by the officer or soldier.
Comments - A nice gender recognition update, but otherwise no change.

OLD - Rights of burial and tombs in use as repositories for the dead.
NEW - Rights of burial and tombs in use as repositories for the dead.
Comments - The words “in use” implies that the plot is only exempt if other family members are already buried there. If you purchase a plot, and no other family member is buried there prior to your petition date, this would mean it is non-exempt. It would still seem worth trying to exempt it, but we don’t know how that would turn out. In reality this doesn't seem like an asset the trustee is likely to auction for much.

OLD - One sewing machine, in actual use, not exceeding $200.
NEW - One sewing machine, one computer and one television, in actual use, not exceeding $300 each in resale value.
Comments - Even though a specific exemption has been added for a TV and a Computer, these items would also likely fit into the Household Furnishings exemptions. I'll also note that my mom, an avid quilter, would be happy about the sewing machine value increase (not that it matters to you, but maybe she'll be happy to get mentioned on our blog).

OLD - Share in Co-Ops, not exceeding $100.
NEW - Share in Co-Ops, not exceeding $100.
Comments - Also never needed this one. Not yet anyway.

OLD - Estates of homestead as defined in ch. 188 or, in lieu thereof, the amount of money each rental period, not exceeding $200 per month, necessary to pay the rent for the dwelling unit occupied by him and his family.
NEW - Estates of homestead as defined in ch. 188 or, in lieu thereof, the amount of money each rental period, not exceeding $2,500 per month, necessary to pay the rent for the dwelling unit occupied by him and his family.
Comments - Homestead exemption remains at $250,000. You get the full $500,000 if you’ve lived there for 3 years. In addition, the practical application of this section will be affected by the new MA Homestead Law.

OLD - Cash, savings, wages, not exceeding $125.
NEW - Cash or savings, not exceeding $2,500 (and wages equal to the greater of 85% of the debtor’s gross wages or 50 times the greater of the federal or the Massachusetts hourly minimum wage for each week or portion thereof).
Comments - The Trustee has opposed our characterization of accounts receivable as wages in the past, and required that they be considered an asset. These limitations should be considered if you are owed wages, and could perhaps affect the timing of your filing.

OLD - An automobile, not exceeding $700.
NEW - An automobile, not exceeding $7,500 (a handicapped person or a person 60 years of age or older shall be exempt up to $15,000 ).
Comments - This is a major increase, and is an issue in almost every case (because most people aren't riding their 2 cows to work). In fact, this increase is greater than the Federal Exemption ($3,225) and may play a big part in choosing the Massachusetts Exemptions in the future.

ADDITIONAL NEW SECTIONS- The debtor’s aggregate interest in any personal property, not to exceed $1,000 in value, plus up to $5,000 of any unused dollar amount of the aggregate exemptions provided under clauses Second (household furnishings), Fifth (tools) and Sixteenth (auto).
Comments - Again, this brings the Massachusetts Exemptions more in line with the Federal Exemptions (which contain a $1,075 catch-all).

ADDITIONAL NEW SECTIONS- The debtor’s aggregate interest in jewelry, not to exceed $1,225 in value.
Comments - Most often used for wedding rings (I guess people like to keep those if possible). $1,350 under Federal Exemptions.

Overall Comments - Many of these changes appear to be drafted with the intention of preventing or limiting wage garnishment or asset seizure in conjunction with collections cases. The bankruptcy code will allow them to be honored as exemptions, which, in many ways, are more generous than the federal exemptions. However, considering the frequency that the Massachusetts Exemptions are amended versus the frequency that the Federal Exemptions are amended, there will be a point where these figures will stagnate, and you will still be better served by the Federal Exemptions, which update often.

Click here to read the current Massachusetts Personal Property Exemptions (the Old Law) and here to read the New Law (effective on April 7, 2011).

What if my Bank tells me to Stop Paying my Mortgage?

We get this question all the time from potential bankruptcy clients, and we always answer this question with a question: Do you have that in writing?

Unfortunately, more and more people are claiming they were told by bank customer service representatives that they should stop paying their mortgage payments. In many cases this is the "advice" given when requesting a refinancing or trying to convince a bank to accept a short sale. However, I have never had one of these homeowners tell me that they obtained this advice in writing.

The result is too often a foreclosure proceeding that the homeowner now wants to avoid. But if they can't cure the arrears they may not be able to keep the property at this point unless they can prove the advice that they were given. According to a recent ABA Journal article, even a Judge fell for this trap.

If you have a mortgage, it requires you to make regular payments or end up in default, which could lead to foreclosure. Don't take advice that says any different unless you get a written agreement from the bank to forgo payment. If you don't make your payments, and have no evidence that the bank advised you to do so, then you put yourself at risk of foreclosure.

How should I List My Car on the Bankruptcy Schedules?

We recently posted about how the bankruptcy law affects your automobile, and whether or not you will be able to keep it if you file. One of the factors discussed in our previous post is how much equity is in your car (value minus loan balance). But what if the trustee disagrees about the value of your car?

In Schwab v. Reilly, 130 S.Ct. 2652 (2010), the Supreme Court decided that a trustee could auction an item of personal property (kitchen equipment in this case) and pay to the debtor any amount claimed exempt and distribute any excess received to the creditors.

As an example, if you list the value of your car to be $3,000 and claim a $3,000 exemption, then your car is fully exempt under the Federal Exemptions. However, under the Schwab case, if the trustee believes your car to have a value over $3,000, then the trustee can take the car, auction it, give you $3,000 and pay any extra received to the creditors. Considering that in this example you had further exemption available ($225 for a motor vehicle and up to $11,200 in "wild-card"), this result seems unfair, but is within the trustee's powers.

We generally recommend that clients obtain a fair market value for their car from kbb.com, nada.com or edumunds.com rather than guess or estimate the value.

In addition, in order to avoid the scenario in Schwab, when listing your car (or other personal property that is particularly important to you) in the bankruptcy schedules you should claim the exemption up to the maximum amount available by stating in the description of the item that "debtor intends to exempt 100% of fair market value." This is the language suggested by the Supreme Court in Schwab.

UPDATE: The Massachusetts Exemptions have recently changed. For more information read our post on the changes: New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.

New Homestead Exemption in Massachusetts

Each state provides for a homestead exemption for debtors filing for bankruptcy. A homestead exemption allows for a debtor to protect the equity in his or her homestead, up to certain limits.

The law as it had been written left some questions unanswered, and two weeks ago an amended Homestead Law was signed (which will take effect in March, 2011) in Massachusetts that attempts to provide some guidance.

In figuring out what this means to you, it is important to know the nature of your ownership interest in your homestead. All individuals owning real estate used as their home shall have a homestead exemption in the amount of $125,000. If there are multiple owners of the real estate as joint tenants (a form of ownership where the real estate passes automatically to the surviving owner or owners upon the death of another owner) or as tenants by the entirety (joint tenants for married couples), each owner has a homestead exemption of $125,000, but the aggregate may not exceed $125,000. If the real estate is owned as tenants in common (the most common form of real estate holding, pun intended), the owners are allowed a homestead exemption in accordance with their percentage interest. For example, a twenty percent owner as a tenant in common would be entitled to a $25,000 homestead exemption (20% x $125,000).

The prior law left some ambiguity as to whether multiple owners filing a Declaration of Homestead would interfere with the homestead exemption. A Declaration of Homestead is what you need to file in order to claim a homestead exemption. Basically, it prevents a creditor of less than the amount of equity in your house from foreclosing on your house. The new law makes clear that multiple owners may claim a homestead in the same home. Additionally, trust beneficiaries may claim a homestead estate.

The new homestead law clarifies that two-to-four family homes, condominiums, co-operative housing and manufactured homes may be covered by a homestead declaration as well.

If you would like more information about how to prepare a Declaration of Homestead, contact Attorney Matthew Trask or call 508.655.5980 to schedule a one-hour consultation.

What Will Happen to My Car if I File for Bankruptcy?

When filing for Bankruptcy under Chapter 7 and Chapter 13, certain property of the debtor is exempt from the Bankruptcy estate, which means simply that the debtor can keep that property (and the trustee and creditors can't take it).

When filing a Bankruptcy as a resident of Massachusetts a debtor can choose to use the exemptions allowed under either State or Federal law, but you must choose one or the other. There are many exemptions that are similar under both schemes and many that are different.

As of April 14, 2009, the allowable exemption for motor vehicles was $3,225 under the Federal Exemptions and $700 under the Massachusetts Exemptions. This means that if you choose the Federal Exemptions you can keep your car so long as it has less than $3,225 in equity (value of the car minus balance of the loan).

In addition to the value of the motor vehicle exemptions, the Federal Exemptions also allow for some "wild-card" exemptions: $1,075 generally and $10,125 of unused homestead exemption. If you have few other assets besides your car you may be able to use these "wild-card" exemptions to exempt further equity in your car if it has equity over $3,225.

If your car is subject to a loan you will have to reaffirm said loan or the car will be surrendered to the lender or trustee for sale. For more information about available exemptions click here.

UPDATE: The Massachusetts Exemptions have recently changed. For more information read our post on the changes: New Massachusetts Property Exemptions: The Return of 2 Cows, 12 Sheep and 2 Swine.