(CN) – Debtors who don’t have car payments can deduct the expense of owning a vehicle from their monthly disposable incomes in a Chapter 7 bankruptcy filing, the 5th Circuit ruled.
“This issue has been heavily litigated and there is a split among the courts that have addressed the issue,” Judge Davis wrote.
The New Orleans-based federal appeals court adopted the 7th Circuit’s plain-language approach in holding that ownership expenses are deductable from disposable monthly income.
Petitioners Troy and Elaine Tate qualified for Chapter 7 bankruptcy when they deducted $471 and $332 per month for two vehicles, because their disposable monthly income dropped to $138. The Tates owed no money on the cars.
Had the court barred them from deducting the expenses, their only option was a Chapter 13 filing, which would’ve required them to repay a portion of their debts.
“[C]osts are associated with vehicle ownership, even when no lease or loan payments are due,” Davis wrote.
“Also, disallowing the deduction has arbitrary results, punishing a debtor who completes paying for their car before filing for bankruptcy and rewarding those who make purchases closer to the time of filing.”