<img src="//bat.bing.com/action/0?ti=5189112&amp;Ver=2" height="0" width="0" style="display:none; visibility: hidden;">

    The Lawletter Blog

    BANKRUPTCY: Qualification of Debtor—Means Test

    Posted by Gale Burns on Wed, Mar 9, 2011 @ 15:03 PM

    The Lawletter Vol 35 No 4, March 4, 2011

    Tim Snider, Senior Attorney, National Legal Research Group

    The U.S. Supreme Court recently had occasion to examine one of the more controversial provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").  Chapter 13 of the Bankruptcy Code uses a statutory formula known as the "means test" to help ensure that debtors who can pay creditors do pay them.  The means test instructs a debtor to determine his "disposable income"—the amount he has available to reimburse creditors—by deducting 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).  For a debtor whose income is above the median for his state, the means test identifies which expenses qualify as "amounts reasonably necessary to be expended."  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 for the area in which the debtor resides."  Id. § 707(b)(2)(A)(ii)(I).

    In Ransom v. FIA Card Servs., N.A., 131 S. Ct. 716 (Jan. 11, 2011), the Chapter 13 debtor claimed as expenses the full amount of the allowable monthly vehicle ownership expense, $471, plus a separate deduction of $388 for vehicle operating expenses.  An unsecured creditor challenged confirmation of his Chapter 13 plan on the ground that he did not qualify for claiming the vehicle ownership expense since he owned his car outright.  The means test, of which the expense allowances are a component, is borrowed from Chapter 7, 11 U.S.C. § 707(b)(2)(A).  If a debtor cannot satisfy the Chapter 7 means test, his petition is presumptively filed in bad faith and is subject to dismissal.

    The bankruptcy court denied confirmation of Ransom's plan, reasoning that the debtor could claim as a vehicle ownership expense the cost of monthly purchase or lease payments.  He could not claim any vehicle ownership expense if he owned the car outright.  The bankruptcy courts are split on the subject, but the three appellate courts to have addressed the issue agreed with the debtor that he could claim the vehicle ownership expense irrespective of whether any amounts were owed on the vehicle.  See In re Washburn, 579 F.3d 934, 935 (8th Cir. 2009) (permitting the allowance); In re Tate, 571 F.3d 423, 424 (5th Cir. 2009) (same); In re Ross‑Tousey, 549 F.3d 1148, 1162 (7th Cir. 2008) (same).  The Supreme Court disagreed and overruled those cases.  The Court interpreted the use of the word "applicable" in the statute, 11 U.S.C. § 707(b)(2)(A)(ii)(I), as meaning that the debtor may not claim all monthly expenses but only those that are "applicable" to him.  If he owns his car outright, as did Ransom, then he owes no monthly purchase or lease payments, and thus the expense item is not applicable to him.  The Court reasoned as follows:

    Because we conclude that a person cannot claim an allowance for vehicle‑ownership costs unless he has some expense falling within that category, the question in this case becomes:  What expenses does the vehicle‑ownership category cover?  If it covers loan and lease payments alone, Ransom does not qualify, because he has no such expense.  Only if that category also covers other costs associated with having a car would Ransom be entitled to this deduction.

    The less inclusive understanding is the right one:  The ownership category encompasses the costs of a car loan or lease and nothing more.

    Ransom, 131 S. Ct. at 725.

    If a prospective debtor owns a motor vehicle (as most do), then the prudent course would be to file the petition while the debtor still owes at least one monthly or lease payment on the vehicle.  There is no statutory limit on how much (or how little) remains on the debtor's vehicle contract for purposes of claiming the vehicle ownership deduction.  Once the purchase or loan payment is fully paid during the course of the plan, however, creditors may move for a modification of the plan accordingly.  The rule is arbitrary, as the Court conceded, but it is arbitrary because Congress made it so.  The task of the Court was to apply the statute as Congress has written it.  Like so many other presumptively curative amendments to the Bankruptcy Code, this one creates its own anomalies.  That said, at least the lower courts are given guidance on an issue that had proven to be contentious.

    Topics: legal research, bankruptcy, Tim Snider, Supreme Court, Chapter 13, means test, disposable income, Ransom v. FIA Card Servs., Bankruptcy Code, 11 U.S.C. § 707, The Lawletter Vol 35 No 4

    New Call-to-action
    Free Hour of Legal Research  for New Clients
    Seven ways outsourcing your legal research can empower your practice

    Subscribe to The Lawletter

    Latest Posts