In Ransom v. FIA Card Services, N.A., No. 09-907, 562 U.S. _____ (2011), Justice Kagan delivered the opinion of the Court finding: “A debtor who does not make loan or lease payments may not take the car-ownership deduction.”
The Supreme Court’s opinion answered the narrow question of whether an above-median income debtor, who has no loan or lease payment, may take the “ownership” deduction in determining his projected disposable income. In reaching its conclusion, the Court interpreted the phrase, “applicable monthly expense amounts,” in §707(b)(2)(A)(ii)(I). Such expenses are determined with reference to the IRS’s National and Local Standards which provides for both “Ownership Costs” and “Operating Costs.” The Court found that “Ownership costs” referred to payments on loans or leases relating to the vehicles; an expense not actually incurred by debtors who own their vehicles outright. Debtors with ownership of their vehicles would instead be entitled to the “Operating Costs” deduction. The Court found that this decision harmonized with the “context and purpose” of the Bankruptcy Code to require debtors to pay creditor the “maximum they can afford.”
This case is a win for the consumer credit industry and its allies in the United States Trustee Program. But the narrow scope of the opinion still leaves many unanswered questions. Though the Court specifically declined to answer the question of what happens when the debtor has an expense but it is lower than the amount stated in the table, a fair reading of the opinion would allow debtors who pass through the “gateway” to take the full amount of the expense. The reasoning of the decision makes it difficult to see how anything but the amount in the IRS table is to be used once the ownership allowance is found to be “applicable”. The statute refers to the “amount specified” in the standards and the court’s decision described the standards as “tables that the IRS prepares listing standardized expense amounts for basic necessities.” Although the creditor in Ransom argued that this amount serves as a cap, the relevant language in the decision refers to treating the standards as a cap as “IRS practice” rather than any result dictated by the IRS standards. Since the IRS also has discretion deviate from the standards in other ways if it chooses, including upwards, it is clear that IRS practice cannot be simply imported wholesale into the section 707(b)(2) means test.
The Internal Revenue Service and the United State Trustee have allowed an additional operating expense allowance for older or high mileage car of $200. Nothing in the Court’s opinion limits debtors’ continued use of this deduction. While this allowance does not appear in the tables of IRS expense standards, the Internal Revenue Manual refers to it as an operating expense that is allowed. The court of appeals decision affirmed in Ransom expressly permitted the $200 expense. Ransom v. MBNA Am. Bank, N.A. (In re Ransom), 577 F.3d 1026, 1031 (9th Cir. 2009). In circuits that ruled contrary to Ransom, we will likely see an increase in the use of this deduction as the additional ownership deduction is eliminated.
Importantly, the Court notes that if car payments end during the life of the plan unsecured creditors may move to modify the plan. Consumer advocates have long argued that chapter 13 plans should be confirmed based on the debtor’s financial circumstances at the time of confirmation and not future events. This Court’s opinion today confirms that the mechanism for increasing plan payments after car payments cease or 401K loan repayments end is for the creditor or trustee to seek a modification based on the changed financial circumstances. Any amended plan may also take account of any other changed circumstances affecting the debtor’s financial situation. This is contrary to the position that some courts have taken in which debtors must propose stepped up payments in their original plans to account for such future circumstances.
In the chapter 7 context, this should mean that a court cannot assume that, just because a debtor’s payments for amounts allowed by the means test will cease after a year or two, the debtor will then have more income available to pay debts that can be considered under the means test or section 707(b)(3).
Finally, going forward it will be important for debtors to ensure that they have reliable transportation that will carry them through the life of the plan because, under Ransom, the chapter 13 means test formula will not allow them to save for a replacement car. “[A]dvice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause.” Milavetz, Gallop & Milavetz, P.A. v. United States, 130 S. Ct. 1324, 1339n.6 (2010). Under Ransom, debtors who had previously saved money to purchase a car will not be able to claim that expense under the means test during a chapter 13 plan. A chapter 7 debtor will have difficulty obtaining financing after a bankruptcy case is filed.
As a lone dissenter, Justice Scalia stated: “In my judgment the ‘applicable monthly expense amounts’ for operating costs ‘specified under the . . . Local Standards,’ are the amounts specified in those Standards for either one car or two cars, whichever of those is applicable.”
