How a cheap car payment can help with the means test

The 2005 Bankruptcy law, known BAPCPA or sometimes BARF, was designed to make bankruptcy much more painful for families making over the average income in each state. For Virginia, in the summer of 2018, that's $103,549 for a family of 4. Or $111,949 for a family of five.

The bankruptcy means test determines whether families making over that average income can be eligible for Chapter 7 anyway. And if not eligible anyway, how much they have to pay for five years in a Chapter 13.

The means test formula is arbitrary, and was designed to be arbitrary, because Congress, and the credit card companies, thought that bankruptcy judges were too easy.

Most families around here, making too much to get approved for Chapter 7, end up failing at Chapter 13. Without careful planning the means test will put you into a Chapter 13 plan that you are never going to be able to afford for five years.

Here's one example where careful planning can make all the difference.

John and Tanya is live Woodbridge in a house they own with two children. John is stationed at Joint Base Andrews; Tanya is home with the kids, one child needing special attention.

Trying to handle the debts, they have gotten by as a one car family, and John's car now has 110,000 file on it.

If John and Tanya go into Chapter 13 now, they get a budget allowance of $497 for the car payment (regardless of what the payment really is) and $221 for gasoline, car repair and car insurance. It will be impossible for John to hold his car operating expenses, gas, repairs, insurance, below $221 for five years on a car that already has 110,000 miles.

If they come to talk to me before their credit is totally shot, I can point out to them that they are much more likley to survive Chapter 13 for five years, if they go out and get a low payment second car now.

If Tanya can buy a brand new Nissan Versa, sale price $13,500, at 4.5% for five years, that payment is $227.00 monthly. That $227 payment counts as $497 on the means test. That frees up for the family budget $270 a month. (That's $497 means test ownership allowance, minus the $227 actual payment.) That $270.00 can go to pay things like sports for the kids, which the means test budget does not allow.

And they get a second $221 monthly for operating expenses. If John drives the new Nissan Versa to work, and Tanya takes the older car for errands around town, they have some chance of holding their gasoline, repair and insurance below the new total operating allowance of $442.

(I should note here that it's illegal for me to tell John and Tonya to go out and finance a car. But it's legal for me to tell them that it's legal for them to do it.)

People say that bankruptcy should be a last resort. But you don't want it to be a last minute, last resort. Careful planning is very important for getting the best result.