Supreme Court Case Favors Creditors in Bankruptcy Filings

By Kenneth Lenz, Board Certified Consumer Bankruptcy Attorney
"The point of the language of the law is to allow debtors who own cars an `ownership deduction.’"

Supreme Court Ransom case favors creditors in bankruptcy filings

Posted: January 21, 2011

New Haven, CT-- The Supreme Court recently handed down a decision that effects 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, even if the car they own is in need of immediate replacement.

“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 Kenneth Lenz, managing partner, at Lenz Law Firm. “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.  If the car you own is not reliable and breaks down, that impacts on the debtors’ ability to get to work.”

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,” Lenz 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 wrote that if the deduction were available to everyone, debtors would purchase $100 junkers just 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 file for bankruptcy because they’ve fallen on hard financial times and they want to pay back as much of their debt as they possibly can,” Lenz said.