Get ownership allowance on the means test

One of the disputed issues in applying the means test has been whether someone who owns their car outright and owes nothing on it gets to deduct the "ownership" allowance provided in the IRS guidelines.

Courts generally agree that even if only one payment is remaining on the car when a bankruptcy case is filed,the debtor gets the allowance for that expense. And that one remaining payment drives the calculation for the length of the case. In the West, that ownership allowance is $478 per month.

The 9th Circuit Bankruptcy Appellate Panel recently held in Ransom that a debtor who had no payment secured by the car did not get the allowance.

So, debtors can consider whether they want to assure themselves of getting the ownership allowance by borrowing a small amount of money prior to filing and pledging their car as collateral for repayment of the debt.

Creating a claim secured by vehicle

The requirements for a valid secured debt on a vehicle are

The written note is easy: it is the "I promise to pay to NAME" statement. It includes the amount of the debt, the interest rate, and when the payment is due. It could be due in a lump sum months from now, or payable monthly, or due on demand.

A security agreement is like a deed of trust and contains the "language of grant" by which the owner of an asset grants, or conveys, an interest in the asset to secure a debt. The promissory note can function as the security agreement if it contains language such as "I pledge my car, described as...., as security for my obligation to pay."

Perfection of the security interest in a registered vehicle is accomplished by adding the information about the lien holder ( the lender) to the certificate of title of the vehicle and filing that title, showing the existence of the lien, with the California DMV.

If the certificate of title is not filed with the DMV, the lien is not perfected. It is unknown whether an unperfected lien on a car would be sufficient to entitle the debtor to the car allowance.

There is a belief among non lawyers that taking possession of the certificate of title creates a lien in the person who has the title. Not so. The only way to create a valid lien on a vehicle is to follow the steps above: written note; language of conveyance of a security interest; perfection by filing the certificate of title with the DMV.

Of course, there has to be a real exchange of money behind this transaction. It is not enough to merely claim that you pledged your car for a loan.

More about creating liens in vehicles

DMV video on changing title to vehicles

Prof.Gary Neustadter on California law on vehicle liens

Illogic at work

The Ransom decision is a poster child for the flaws in the bankruptcy amendments of 2005: If this wasn't the result Congress wanted, they failed to enact clear language saying what it was they did want. If this is the result Congress intended, then the treatment of two like debtors ends up radically differenct depending on whether they just made the last payment on their car, or have only one more payment to make.

Like many provisions of the "new" bankruptcy law, we won't know for certain until higher appeals courts consider these cases.