By Correy Stephenson
The Daily Record Newswire
BOSTON, MA -- Justice Elena Kagan's first opinion as a member of the U.S. Supreme Court limited the ability of debtors to take a key deduction and will require strategic planning by bankruptcy practitioners to limit its impact.
In Ransom v. FIA Card Services, an 8-1 Court held that a Chapter 13 debtor with an above-median income who doesn't make loan or lease payments may not take the deduction that is otherwise available for ownership of an automobile.
The Court analyzed the use of the word "applicable" in Bankruptcy Code §707(b)(2)(A)(ii)(I) as it applied to a debtor's monthly expense amounts listed in the Local and National Standards.
Henry Sommer, former president of the National Association of Consumer Bankruptcy Attorneys and head of the Consumer Law Project at Community Legal Services in Philadelphia, said the decision was "a victory for the consumer credit industry and their friends in the United States Trustee's office."
Robert Lawless, a professor at the University of Illinois College of Law and one of the authors of the Credit Slips blog, was also disappointed in the decision.
Given the split in the lower courts, "it's hard to believe there is a determinative plain meaning in the text," or that "a majority of the 535 members of Congress paid attention to what [the word 'applicable'] meant" when they amended the Code in 2005, he said.
O. Max Gardner III, a bankruptcy practitioner in Shelby, N.C., said the case could have a substantial impact because, for most debtors who don't live in a large, metropolitan area with mass transit, "if you don't have a car, you don't have a job."
"In the vast majority of districts throughout the country, a car is pretty essential, and 90 to 95 percent of [Chapter 13 filings] are going to involve motor vehicles," Gardner said.
Sommer agreed, adding that the decision will result in debtors having to pay more to unsecured creditors.
"Bankruptcy attorneys are going to have to use creative strategies to try to blunt some of the impact of the decision," he said, such as having a debtor purchase a car prior to filing a Chapter 13 petition in order to use the deduction.
Jason Ransom's Chapter 13 plan included a deduction from his monthly expenses of the "ownership cost" of a 2004 Toyota Camry that he owned free and clear.
One of his creditors objected to the plan, arguing that the debtor should only be able to deduct vehicle ownership costs if he were making lease or loan payments on the vehicle.
The difference over the 60 months of the plan for the $471 per month deduction was roughly $28,000 more for unsecured creditors.
The bankruptcy court, the 9th Circuit Bankruptcy Appellate Panel and the 9th Circuit denied the deduction.
The justices agreed.
They said that Congress established a "filter" so that debtors would know which deductions to take in which listed categories under the National Standards or Local Standards.
"A debtor may claim a deduction from a National or Local Standard table (like '[Car] Ownership Costs') if but only if that deduction is appropriate for him. And a deduction is so appropriate only if the debtor has costs corresponding to the category covered by the table -- that is, only if the debtor will incur that kind of expense during the life of the plan," Justice Kagan wrote.
"Based on [the Bankruptcy Abuse Prevention and Consumer Protection Act's] text, context and purpose, we hold that the Local Standard expense amount for transportation 'Ownership Costs" is not 'applicable' to a debtor who will not incur any such costs during his bankruptcy plan. Because the 'Ownership Costs' category covers only loan and lease payments and because [the debtor] owns his car free from any debtor or obligation, he may not claim the allowance," the Court said.
Justice Antonin Scalia filed a dissenting opinion.
The decision resolves a split in the circuits.
While the 8th Circuit Bankruptcy Appellate Panel agreed with the 9th Circuit, there was contrary authority from the 5th and 7th Circuits, as well as from Bankruptcy Appellate Panels in the 6th and 10th Circuits.
Bankruptcy attorneys highlighted another key point of the opinion: that courts shouldn't project forward to the end of car loan or lease payments, but instead deal with the change through the plan modification process.
Section 1329, which allows for a modification of the plan if a good faith reason and substantial change of circumstances exist, should be used if a debtor's loan or lease payments expire during the course of a Chapter 13 plan, Justice Kagan wrote.
"Either the trustee or an unsecured creditor could file a §1329 motion to increase plan payments or otherwise modify the plan," Gardner explained.
But the provision could also work to a debtor's advantage.
Congress failed to incorporate the §1325 means test into §1329, which means that a modified plan could be less than 60 months -- and other requirements under BAPCPA are not included either, Gardner said.
The provision is a "slippery slope for Chapter 13 trustees," who may think they have a chance to increase payments but don't realize the analysis will return to the pre-bankruptcy reform days, he said.
Sommer noted that debtors may also opt for an additional $200 deduction for vehicle operating expenses under the IRS guidelines for "older vehicles," defined as a car more than six years old or with more than 75,000 miles.
Because of the crackdown on credit offers, Gardner said his clients typically have such cars because their credit scores are too low to be able to purchase or lease new cars.
The 9th Circuit opinion in Ransom allowed for the additional $200 operating expense deduction, Sommer noted, and since the justices affirmed that decision, that deduction "should remain available to debtors."
Published: Tue, Jan 18, 2011
