The "Car payment reduces income myth"

[no_it_all]

Myth number one: Go out and finance a car. You then get to deduct the payment from your income!

Myth number two: Gee, I don't have a car payment. Joe does. Joe will get a payment deduction and I won't!

Myth number three: My new five year loan for 30K on the eve of my BK was very smart! Look how much I get to deduct on my B22 form!

Myth number four: My new car payment allows me to pass the Means Test! Yippee!!

Fact number one: Only a small portion (if ANY) of your payment is deducted from your income. On a typical $470 monthly car payment NOTHING is deducted from your income!

Fact number two: If you own a vehicle, you get a deduction in income. It doesn't matter if you have a payment or not!

Fact number three. Going into debt on 20 or 30K for five years on the eve of a BK for a depreciating asset makes no fiscal sense whatsoever!

Fact number four: Your new car payment will have little or more likely NO effect on whether you pass the means test or not.

Fact number five: The two car loophole in the Means test. If you don't have two cars, GET TWO!! Buy a beater junk that barely runs and park it in your back yard (if you live down South, put it in front). Tag it and insure it and take the second car Means Test deduction for it!

Remember: Any car payment is deducted from one line on the Means test and then added to another line. The net result most of the time is ZERO change to your disposable income!!

Your test for this week is to look at an actual B22 form and figure out why!

[bige1030]

If you already have two cars, financing a third does make sense in terms of maximizing your expenses on the means test. After all, you get NO transportation ownership/lease expense on a third car, but you *do* get to deduct all average monthly payments to secured creditors.

[loonzilla]

Good info...questions though:
1. On the means test, I thought if you don't have a car payment, you don't get to use the vehicle ownership deduction. You only get to use the vehicle operating expense.
OR
2. Was that only for calculating disposable income in chapter 13.
3. WHy did lawyers (pre-new law) advise to finance a car prior to bankruptcy?

In another post (I searched for ownership costs on the forum) it discussed a case where someone tried to use the IRS allowable deductions for ownership cost but the courts wouldn't allow it...but they gave the owners a $200 deduction since the car was old (80K or 7 years old, I think). I don't think it was clear whether it was regarding means test or using that amount on the schedules.

I believe having a car payment only adjusts (on the means test) the Chapter 13 adminstrative costs.

I agree getting a loan prior to bankruptcy is not smart (you're trying to get financial freedom!) BUT most of the posts on this forum dealt with people who had unreliable transportation so it was advised to get a different car. It would probable be more difficult to get a loan after BK than prior.

If you need a different car to have reliable transportation, why not get it prior to BK since:
1. You will get to deduct that expense from your schedule J.
2. I'm guessing it would be easier to explain a $300-$400 monthly car payment versus a $300-$400 upkeep expense for your paid off vehicles unless you had receipts to back up that number.

Just my thoughts...great post!

[bige1030]

Good info...questions though:
1. On the means test, I thought if you don't have a car payment, you don't get to use the vehicle ownership deduction. You only get to use the vehicle operating expense.

I didn't even realize that! I looked it up, and it looks like you're right. Check this out from the IRS Standards:
"If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment, or no car, only the operating costs portion of the transportation standard is used to come up with the allowable transportation expense."

2. Was that only for calculating disposable income in chapter 13.

That's one reason for it. The other is to prove that you're eligible for Chapter 7 if your household income is above the median for your state and household size.

3. WHy did lawyers (pre-new law) advise to finance a car prior to bankruptcy?

I think you got it spot on later on in your post...so that filers with junk cars can get reliable transportation without dealing with sub-prime lenders after BK.

I believe having a car payment only adjusts (on the means test) the Chapter 13 adminstrative costs.

That and what you said about being eligible for the ownership expense.

[LostOne0069]

So don't buy a $30,000 car with huge payments and don't buy a $200 car and pay cash.

Buy a $1000-$2000 car, finance it at a buy here, pay here place over a 6 or 12 month term and BANG! you have a car payment to use for the means test. Then, once the bk is done... sell the car. Chances are you'll be able to get most of what you paid for it back. Much cheaper than a chapter 13.

Good luck!