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Surrendering a car in chapter 13 bankruptcy will negatively effect amount paid unsecured creditors

A chapter 13 bankruptcy requires that an “above median” debtor take a “means test” in order to determine how much that debtor must pay to unsecured creditors during the plan. This amount is called “disposable monthly income”.

A key to obtaining a favorable i.e. low number is to be able to show the highest “budget” possible when taking this test.

In an attempt to do so, many bankruptcy filers throughout the U.S. have been showing as part of their budget the debt owed on cars they know will be surrendered, with some mixed results.

The question of whether this is possible has ended in the 9th circuit.

In American Express v. Smith, the Court of Appeals has ruled that subsections (b)(2) and (b)(3) of section 1325 of the bankruptcy code provide that if an expense is not reasonably necessary “for a debtor’s and/or dependants’ maintenance and support, it is not included in the calculation of disposable income”…”items that a debtor has surrendered or intends to surrender are not necessary for his or her support or maintenance.”

In other words, if you know you are not going to keep the car for whatever reason, the amount you owe on it can’t be used to determine the amount you can pay your unsecured creditors in a chapter 13 bankruptcy. i.e. you will end up paying more to unsecured creditors if surrendering the car.