Bankruptcy/Debtor-Creditor Rights Blog

SUPREME COURT OF THE UNITED STATES TO DECIDE IF AN ABOVE MEDIAN INCOME DEBTOR SEEKING RELIEF IN A CHAPTER 13 BANKRUPTCY CAN DEDUCT FROM HIS PROJECTED DISPOSABLE INCOME A VEHICLE WHICH HE OWNS FREE AND CLEAR

Posted May 21, 2010

Author: Alex T. Gray

The circuits have been in debate over whether a debtor can deduct a vehicle which he owns free and clear from his projected disposable income.  Under the means test of 11 U.S.C. § 707(b)(2), an above median income debtor may deduct applicable monthly expenses from his projected disposable income.  The debate rests largely on the definition of “applicable” as used in relation to ownership costs of vehicles.   Does the ownership cost of a vehicle include fictional payments for a car already fully paid for?

The circuits which have answered in the affirmative use the “plain language approach” to justify their conclusion.  See Tate v. Bolen, 571 F.3d 423 (5th Cir. 2009); Ross-Tousey v. Neary, 549 F.3d 1148 (7th Cir. 2008).  Under the plain language approach, the courts have distinguished the word “applicable” from “actual,” stating that deduction applies to a debtor if he possesses a vehicle regardless of whether there is an actual expense.  See Ross-Tousey, 549 F.3d at 1157–58.  The circuits that have answered in the negative, including the Eighth Circuit, have held that a debtor cannot deduct the expense of a vehicle owned free and clear.  See Ransom v. MBNA, 577 F.3d 1026, 1029 (9th Cir. 2009); see also In re Wilson, 577 F.3d 1026 (B.A.P. 8th Cir. 2008).  These circuits are split between the “IRM approach” and the “statutory language, plainly read” approach.  Id. at 1029–30.  The IRM approach uses the IRS guidelines to determine how vehicle expenses are calculated; per the IRS guidelines a debtor must have a car payment to take an ownership cost deduction.  Id. at 1029.  The statutory language approach, which attempts to construe the statute as consistent with Congress’s intent that “debtors repay creditors the maximum they can afford,” interprets the statute to mean that an “ownership cost” is not applicable or actual when there are no payments being made on the vehicle.  Id.

The case currently before the Supreme Court, Ransom v. MBNA, will hopefully settle the debate. In Ransom, the above median income debtor deducted $471.00 from his monthly disposable income for a 2004 Camry which he owns free and clear.  577 F.3d at 1027.  MBNA objected to this deduction and confirmation of the plan.  Id. at 1028.  The bankruptcy court and the bankruptcy court of appeals agreed that the debtor could not deduct a vehicle ownership cost for a vehicle he owned free and clear.  Id.   The Ninth Circuit affirmed, holding 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.”  Id. at 1030.  The Supreme Court’s decision on this case will likely impact the significance of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).  The BAPCPA was enacted to require above-median income debtors to make more funds available to unsecured creditors by limiting the court’s authority to allow expenses.  In re Wilson, 383 B.R. at 733.  As the Eighth Circuit B.A.P. stated in In re Wilson, “[i]t would turn the logic of BAPCPA on its head to allow above-median debtors such a deduction.”  Id. at 734.  However, those who are proponents of the deduction have stated that without it debtors are encouraged to purchase new vehicles before filing for bankruptcy and will benefit from both a new vehicle and the deduction.

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