The United States Supreme Court (SCOTUS) has granted certiorari to decide whether, in calculating the “projected disposable income” that an above-median- income Chapter 13 debtor must devote to the payment of unsecured creditors, in order for the court to confirm, over an unsecured creditor’s objection, a plan that provides for less than 100% dividend on unsecured claims, a bankruptcy court may allow an ownership cost deduction for a vehicle even if the debtor is not actually making payments on the vehicle.
In the case below (In re Ransom, 577 F.3d 1026 (C.A.9 2009)), the Ninth Circuit Court of Appeals held that such a debtor was not entitled to a vehicle ownership expense deduction for a vehicle that he owned free and clear of liens. A Chapter 13 debtor’s “disposable income” is defined as “current monthly income received by the debtor … less amounts reasonably necessary to be expended … for the maintenance and support of the debtor…. ” For above-median income debtors, the “amounts reasonably necessary to be expended” is to be determined “in accordance with” the means test set forth in 11 U.S.C.A. 707(b)(2).
Under the “means test,” a 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 for the area in which the debtor resides…. ” The IRS’s Local Standards include allowable transportation expenses, which are broken down into two categories: (1) operating costs and public transportation costs, and (2) “ownership costs.” At issue in the case at bar was whether the ownership cost deduction is “applicable” under 707(b)(2)(A)(ii)(I), and therefore allowed, to a debtor who owns his vehicle free and clear and thus does not have any loan or lease payments on his vehicle.
The statutory language, plainly read, does not allow a debtor to deduct an “ownership cost” (as distinct from an “operating cost”) that the debtor does not have, the Ninth Circuit determined. An “ownership cost” is not an “expense”-either actual or applicable-if it does not exist, period, the Court of Appeals reasoned, adding that it would be ironic to diminish payments to unsecured creditors in this context on the basis of a fictitious expense not incurred by a debtor. The ordinary, common meaning of “applicable” further supported the court’s conclusion. “Given the ordinary sense of the term ‘applicable,’ how is the vehicle ownership expense allowance capable of being applied to the debtor if he does not make any lease or loan payments on the vehicle?” the Court of Appeals asked.
There is “a significant split in authority” on this issue, the Ninth Circuit acknowledged. Some courts have allowed the deduction of an “ownership cost” for a vehicle that is subject to neither secured debt nor a lease, while other courts have not. Most recently, the Fifth and Seventh Circuits have joined the camp allowing the deduction, which put the Ninth Circuit “in the uncomfortable position” of disagreeing with them, the Court of Appeals noted.
In his petition for a writ of certiorari, the debtor argued that the plain language of the statute, as determined by the Fifth, Seventh, and Eighth Circuits, should prevail, and that a debtor should be allowed a deduction for the ownership costs of a vehicle regardless of whether the debtor is still making loan or lease payments. The petition criticized the Ninth Circuit for introducing an extrinsic standard, namely, the procedures of the IRS Manual, to determine the proper treatment of deductions under the Bankruptcy Code.
A decision is expected next term. When the Supreme Court releases its decision, I’ll post an update.
