Tuesday, February 1, 2011

FYI: US Sup Ct Limits Car-Ownership Deduction for BAPCPA's Means Test

The Supreme Court of the United States recently held that, under BAPCPA's
means test, a debtor in Chapter 13 Bankruptcy who does not make loan or
lease payments may not take the car-ownership deduction.

A copy of the opinion is available at:

This case came before the Supreme Court on certiorari from the United
States Court of Appeals for the Ninth Circuit. Petitioner Jason Ransom, a
debtor in Chapter 13 Bankruptcy, had liabilities which included $82,500 in
unsecured debt, part of which consisted of a claim by respondent FIA Card
Services N.A. Ransom, who owned his vehicle outright, contended that
under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(BAPCPA) means test used to determine a debtor's disposable income, he was
entitled to deductions in relation to the vehicle for both "Ownership
Costs" and "Operating Costs." FIA disputed Ransom's proposed repayment
plan stating that it "did not direct all of Ransom's disposable income to
unsecured creditors" because it improperly included the ownership

As you may recall, Chapter 13 of the Bankruptcy Code enables an individual
to obtain a discharge of his debts if he pays his creditors a portion of
his monthly income in accordance with a court-approved plan. 11 U. S. C.
§1301 et seq. To determine how much income the debtor is capable of
paying, Chapter 13 uses a statutory formula known as the "means test." The
means test instructs a debtor to deduct from his current monthly income
"amounts reasonably necessary to be expended" for, inter alia,
"maintenance or support." 11 U. S. C. §1325(b)(2)(A)(i). The result is his
"disposable income"—the amount he has available to reimburse creditors.

As relevant here, the statute provides that "[t]he debtor's monthly
expenses shall be the debtor's applicable monthly expense amounts
specified under the National Standards and Local Standards, and the
debtor's actual monthly expenses for the categories specified as Other
Necessary Expenses issued by the Internal Revenue Service [IRS] fort he
area in which the debtor resides." The Standards are tables listing
standardized expense amounts for basic necessities, which the IRS prepares
to help calculate taxpayers' ability to pay overdue taxes. The IRS also
creates supplemental guidelines known as the "Collection Financial
Standards," which describe how to use the tables and what the amounts
listed in them mean. The Local Standards include an allowance for
transportation expenses, divided into vehicle "Ownership Costs" and
vehicle "Operating Costs." The Collection Financial Standards explain that
"Ownership Costs" cover monthly loan or lease payments on an automobile.
The expense amounts listed are based on nationwide car financing data. The
Collection Financial Standards further state that a taxpayer who has no
car payment may not claim an allowance for ownership costs.

The Supreme Court examined the language of the Bankruptcy Code at
§707(b)(2)(A)(ii)(I), which states, "The debtor's monthly expenses shall
be the debtor's applicable monthly expense amounts specified under the
National Standards and Local Standards." The Court focused on the term
"applicable," stating that whether or not Ransom could claim the car
ownership deduction hinged on whether this amount "is "applicable" to
him." The Court then noted that as this term is undefined in the statute
they look to the "ordinary meaning of the term" which is "appropriate,
relevant, suitable, or fit."

The Court stated that applicability, in the context of BAPCPA, is
determined by making "individualized determination" of a debtor's monthly
expenses. The Court noted that if Congress had not intended to
differentiate between debtors who did and did not qualify for a deduction,
it "could have omitted the term 'applicable' altogether." The Court also
noted that the "statutory context" gives support to this reading as the
Code defines disposable income as "current monthly income…less amounts
reasonably necessary to be expended." Lastly, the Court examined the
legislative intent behind BAPCPA, which was to prevent perceived
bankruptcy abuses by ensuring "[debtors] repay creditors the maximum they
can afford."

Ransom argued that the term "applicable" refers to the deduction tables,
directing the debtor to chose the "applicable" ownership deduction of
whether he or she owned one or two vehicles. The Court noted that this
interpretation made the use of the word "applicable" superfluous, and was
contrary to the statutory purpose effected by the means test giving an
allowance for ""reasonably necessary" expenses." The Court further noted
that "[e]xpenses that are wholly fictional are not easily though of as
reasonably necessary." The Court also disagreed with Ransom's contention
that this reading would conflate "applicable" with "actual", noting that
although an expense can only be deducted if actually incurred, the actual
debtor expenses incurred does not necessarily control, if for instance the
debtor's "actual expenses exceed the amounts listed in the tables…."

The Court also disagreed with Ransom's contention that the car-ownership
deduction cannot cover only loan and lease payments, because a separate
sentence of the means test provides that "notwithstanding" the other
provisions of the test, "the monthly expenses of the debtor shall not
include any payments for debts." The Court held that this sentence did
not apply solely to the car-ownership provision, and that this sentence
could only serve to "exclude, and not authorize, deductions."

Lastly, Ransom argued that his reading of the means test was necessary to
avoid results not intended by Congress. Ransom gave as an example of such
"senseless results" as that of a debtor timing their bankruptcy filing so
that he or she would have only a few car payments left, and thus claim an
ownership deduction that would not be applicable soon after entering
bankruptcy. The Court stated that such anomalies were "the inevitable
result of a standardized formula like the means test", and Ransom's
reading introduced its own problems, namely, "the strangeness of giving a
debtor an allowance for loan or lease payments" when he or she is
incurring no such costs. The Court held that all of Ransom's arguments
miss the point of both BAPCPA and the means test, which are to prevent
bankruptcy abuses while simultaneously assuring that a debtor has enough
money for "reasonable expenses."

Justice Scalia alone dissented from the majority opinion. His dissenting
opinion took issue with the majority's assertion that Ransom's reading of
the word "applicable" would render it superfluous, noting "[t]he canon
against superfluity is not a canon against verbosity." Justice Scalia
then stated that "[t]he point of the statutory language is to entitle
debtors who own cars to an ownership deduction" and that an independent
interpretation of the tables used was unnecessary as there was "little
doubt" that a debtor would be able to choose whether to claim a deduction
for one car or two. Scalia also noted that the Court's job was not to
"eliminate or reduce" the "oddities" mentioned by the court, but to "give
the formula Congress adopted its fairest meaning."

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, Suite 2100
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (866) 581-9302
Mobile: (312) 493-0874
Email: RWutscher@kw-llp.com

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