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Supreme Court case favors creditors in bankruptcy filings

Posted: January 18, 2011

Buffalo, NY -- The Supreme Court recently handed down a decision that affects the “means test” required for debtors filing bankruptcy. In Ransom v. FIA Card Services (MBNA Bank) the court ruled that debtors who own a car outright cannot include what they would pay in monthly car payments if they were purchasing a car as a part of their monthly expenses.

“The means test takes into consideration the total monthly expenses of the debtor and the debtor’s income so the court can make a decision as to how much debt can be paid off while leaving the debtor enough money to live on each month,” said Jeffrey Freedman, senior partner, Jeffrey Freedman Attorneys at Law. “Obviously, if you are making a car payment of $300 to $500 a month, that significantly impacts how much money your creditors are going to get back.”

In this case, Jason M. Ransom of Nevada, claimed a $471 per month allowance for a 2004 car he already owned, while his credit card company claimed only people actually making loan or lease payments should get the deduction.

“If the court had ruled in Ransom’s favor, he would have been able to shield $28,000 from his creditors,” Freedman said. “Not all of the Justices agreed with the decision, however. Justice Scalia said the point of the language of the law is to allow debtors who own cars an `ownership deduction.’

“These kinds of disputes are really the result of trying to apply a general rule -- the law as written by Congress -- to a broad range of situations. It’s not an easy call.”

Justice Elena Kagan said that if the deduction were available to everyone, debtors would purchase $100 junkers so they could take the deduction.

“In this example, Congress and the Courts are leaning toward the premise that debtors try to scam the system. In my 30-plus years of experience that is not the case. Most debtors are filing bankruptcy because they’ve fallen on hard financial times and they want to pay back as much of their debt as they possibly can,” Freedman said.

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