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Deduction requires actual payments

It has been a long and winding road for Wisconsin bankruptcy attorneys who file under Chapter 13 when an above-median income debtor owes no money on his car.

Courts here have gone back and forth on the issue of whether the debtors can include vehicle ownership costs in calculating their disposable income.

But, on Jan. 11, the U.S. Supreme Court finally issued the final word – they cannot.

Bankruptcy attorney James W. McNeilly Jr., of Salem, said in an interview the next day that it is already making a difference.

“I got notice from the trustee today in one case that my client would have to pay an additional $496 per month to the creditors,” he said.

In her first opinion for the court, Justice Elena Kagan wrote, “Because the ‘Ownership Costs’ category covers only loan and lease payments and because [the debtor] owns his car free from any debt or obligation, he may not claim the allowance.”

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) created a “means test,” to determine how much income an above-median income debtor is capable of paying to his creditors when he files for bankruptcy under Chapter 13.

One of the expenses a debtor may be able to claim as reasonably necessary is vehicle ownership expenses.

11 U.S.C. 707(b)(2)(A)(ii)(I) provides in relevant part that: “The 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 [IRS] for the area in which the debtor resides.”

Jason M. Ransom filed for bankruptcy in 2006, and sought to claim a $471 per month deduction pursuant to this provision, for a 2004 Toyota Camry he owned, free of any liens.

Whether he could include the expense or not meant a difference of about $28,000 in the amount he’d have to repay his creditors over the course of the five-year plan.

The bankruptcy court held he could not include the expense. The 9th Circuit’s Bankruptcy Appellate Panel, and the 9th Circuit both affirmed.

The Supreme Court granted certiorari, but also affirmed.

In Wisconsin, the courts have not been so consistent on the issue.

Bankruptcy courts that considered the issue unanimously concluded that a debtor may claim the deduction. In re Sawdy, 362 B.R. 898 (Bankr.E.D. Wis.2007); In re Grunert, 353 B.R. 591 (Bankr.E.D.Wis.2006); In re Clark, Case No. 07-23390 (Bankr.E.D.Wis., Feb. 14, 2008); and In re Long, 372 B.R. 467 (Bankr.W.D.2007).

Invariably, however, when cases were appealed to the district courts, the bankruptcy judges were reversed. In re Ross-Tousey, 368 B.R. 762 (E.D.Wis.2007); Grossman v Sawdy, 384 B.R. 199 (E.D.Wis.2008).

In turn, the 7th Circuit agreed with the bankruptcy courts, and reversed the district courts. In re Ross-Tousey, 549 F.3d 1148 (7th Cir. 2008).

With the Supreme Court’s opinion, Ross-Tousey is no longer the law.

Justice Kagan wrote for the court, “Because Congress intended the means test to approximate the debtor’s reasonable expenditures on essential items, a debtor should be required to qualify for a deduction by actually incurring an expense in the relevant category. If a debtor will not have a particular kind of expense during his plan, an allowance to cover that cost is not ‘reasonably necessary’ within the meaning of the statute.”

The court also found that this interpretation was consistent with the purpose of BAPCPA – ensuring that debtors repay creditors the maximum they can afford.

Ransom argued that, if Congress intended that a debtor actually have a car payment, it would have used the word “actual,” instead of “applicable,” in the statute.

But the court rejected this argument, noting that even debtors who are eligible for the deduction do not deduct their actual monthly car payments, but only the amount established in the standards.

Finally, the court rejected Ransom’s policy arguments. Ransom argued that, under the majority’s interpretation, debtors can time their bankruptcy filings so that they have just one payment remaining, but can still claim the deduction for the life of the bankruptcy plan.

But the court found this “oddity” an inevitable result of all standardized formulas, which are “by their nature over- and under-inclusive.”

Ransom also argued that the court’s interpretation sends the wrong message – that it is better to be deeply in debt on car loans than to pay them off.

But the court disagreed, finding, “Money is fungible.” The court explained that money used to purchase a car outright is money that could have been used to pay down credit card debt instead. “Congress did not express a preference for one use of these funds over the other.”

Justice Antonin Scalia was the lone dissenter, opining that, if Congress had intended that an actual car payment be a prerequisite for taking the vehicle-ownership deduction, it would have limited it so that it applied only so long as payments were actually due.

Milwaukee bankruptcy attorney Leonard G. Leverson said that, while he agreed with the dissent, it is good to have finality on the issue. Going forward, at least, bankruptcy attorneys can advise their clients to plan their affairs so that they can take the deduction.

But he added, “What this unfortunate case shows is how poorly the BAPCPA was drafted. This language – ‘applicable’ – was just not carefully put together.”

One aspect of the case that Leverson did say was a positive sign was that the court considered the legislative purpose of the BAPCPA in reaching its decision.

“For decades, in bankruptcy cases, the court has said ‘we don’t look at the purpose, only the plain language, and enforce it.’ I think this is a big shift in bankruptcy jurisprudence at the Supreme Court,” Leverson said.

McNeilly also said he thought the dissent was the better opinion, because it comported with the black-and-white meaning of the language, and was fairer, although he acknowledged that the majority opinion was soundly reasoned.

The only particular aspect of the majority opinion McNeilly took exception to was the majority’s finding that “money is fungible.”

In practice, McNeilly said, “the reason most debtors owe nothing on their cars is that they are more thrifty, and are driving old cars.”

David Ziemer can be reached at

What the court held

Case: Ransom v. FIA Card Services, N.A., No. 09-907

Issues: Must a Chapter 13 debtor have a monthly car payment in order to claim the vehicle-ownership expense?

Holdings: Yes. Congress intended the deduction to approximate only actual expenses.

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