U.S. Supreme Court Clarifies That Chapter 13 Debtors May Not Deduct Car Ownership Expenses When They Make No Loan Or Lease Payments

In Ransom v. FIA Card Servs., N.A., --- S.Ct. ----, 2011 WL 66438 (U.S. 2011), the United States Supreme Court took up the question of whether a Chapter 13 debtor who owns his or her vehicle outright (“free and clear”) may claim an allowance for car ownership costs and thereby reduce the amount that he or she will repay creditors. In her first opinion, Justice Kagan answered simply—no. The Ransom opinion has been seen as a victory for not only credit card companies like the one involved but other creditors, as well.

As explained in the Ransom opinion, the case involved the “means test,” adopted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). In the context of a Chapter 13 bankruptcy, the means test is applied to debtors whose incomes are above the median for their state, and it provides a formula to calculate that debtor’s “disposable income,” which is the portion of the debtor’s income that will be used to reimburse creditors under the debtor’s court-approved plan. See 11 U.S.C. §§ 1325(b)(1)(B) and (b)(4).

Essentially, the means test formula is the debtor’s “current monthly income” less “amounts reasonably necessary to be expended” for “maintenance or support,” business expenditures, and certain charitable contributions. §§ 1325(b)(a)(A)(i) and (ii).

Under this test, debtors are allowed to claim as “reasonably necessary” expenses certain living expenses as well as certain allowances for secured and priority debt, including “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.” §§707(b)(2)(A)(ii)-(iv).

The Local Standards include an allowance for transportation expenses, divided into two categories: “Ownership Costs” and “Operating Costs.” The debtor in Ransom, who had itemized over $82,000 in unsecured debt, listed among his assets a vehicle valued at $14,000, which he owned free of any debt. When he listed his monthly expenses, he claimed the vehicle ownership deduction of $471 (which is the same nationwide) and a vehicle operating deduction of $338 (which varies geographically).

One of the debtor’s creditors, a credit card company, objected to the confirmation of the plan and argued that he should not be able to claim the vehicle ownership deduction because he did not make loan or lease payments on his car. The difference in Ransom demonstrates the gravity of the opinion for many debtors and creditors. If the ownership deduction was allowed, the debtor’s disposable income would be $210.55 per month as opposed to $681.55 if the deductible were not allowed—a difference of about $28,000 over the five year plan.

The Bankruptcy Court had denied confirmation of the debtor’s plan, stating that he could only deduct the vehicle ownership expense if he was currently making loan or lease payments on a vehicle. The Ninth Circuit Bankruptcy Appellate Panel affirmed, as did the United States Court of Appeals for the Ninth Circuit. Although it recognized a split in authority, the Supreme Court of the United States also affirmed the opinion—holding that the “ownership [deduction] category encompasses the costs of a car loan or lease and nothing more.” That is, it does not cover “other conceivable expenses associated with maintaining a car,” which are mainly covered for the separate deduction for vehicle operating costs. Thus, because the debtor did not actually incur any ownership costs (i.e., loan or lease payments), he could not deduct that amount from his disposable income.

Questions Remaining

Immediately after the issuance of the Ransom opinion, at least two questions remain to be answered.

First, what if the debtor’s actual costs are lower than the Local Standard allowance? As the court noted, the $471 sum is the average monthly payment for vehicle loans and leases nationwide. If a debtor’s actual out-of-pocket costs for vehicle ownership exceed the amount of the deduction, it is still true that they may only claim an allowance for the specified sum—$471—and no more. One question not before the court, and which the Court specifically left unanswered, was the amount a debtor could claim if their out-of-pocket costs were lower than the specified deduction. For example, can a debtor who makes a loan payment of $390 per month claim the total ownership cost deduction of $471 per month. Although the answer to that question will have to wait until another day, it is worth noting that the Government argued that a debtor may claim the specified deduction amount in full regardless of his out-of-pocket costs, provided that (as the Court ultimately required) a debtor has some expense relating to the deduction.

Second, what about the “one payment left” problem? Ultimately, the Ransom Court brushed aside the debtor’s argument that future debtors may file their Chapter 13 bankruptcy with only a few car payments left, but retain the ownership deduction for the entirety of the plan period. According to the Court, “this kind of oddity is the inevitable result of a standardized formula like the means test,” and “[i]n eliminating the pre-BAPCPA case-by-case adjudication of above-median-income debtors’ expenses, on the ground that it leant itself to abuse, Congress chose to tolerate the occasional peculiarity that a brighter-line test produces.” According to the Court, its ruling also avoided the opposite scenario—where a debtor purchases a junkyard car “for a song” immediately prior to filing and thereby reduces their disposable income. In any event, the Court believes that creditors may remedy the “one payment left” problem the debtor suggested by moving to modify the plan to increase the amount the debtor must repay. See 11 U.S.C. § 1329(a)(1).

For a full text of the Ransom opinion, visit http://www.supremecourt.gov/opinions and open “Latest Slip Opinions.”

Posted by: Kyle Melloan

Categories: Bankruptcy & Banking Law, Credit Cards