Issues
Whether an above-median debtor may claim a vehicle ownership cost deduction for vehicles the debtor owns outright.
This case reflects a lack of certainty in the bankruptcy code regarding the proper treatment of the vehicle ownership deduction when calculating an above-median Chapter 13 debtor’s disposable income. Courts are split on whether the deduction can be taken where the debtor owns a vehicle in full and is not responsible for monthly payments on the vehicle. Jason Ransom filed for bankruptcy under Chapter 13 and claimed a vehicle ownership deduction based on his ownership of an automobile that he owned free and clear. The Ninth Circuit found that the vehicle ownership deduction was not permitted if there was no existing obligation on the vehicle. Ransom argues that the court misinterpreted the statute and failed to recognize that a plain reading of the statute supports the deduction. The Supreme Court’s decision will clarify the availability of the vehicle ownership deduction to Chapter 13 debtors who own their vehicles outright.
Questions as Framed for the Court by the Parties
Whether, in calculating the debtor's "projected disposable income" during the plan period, the bankruptcy court may allow an ownership cost deduction for vehicles only if the debtor is actually making payments on the vehicles.
Facts
Jason Ransom ("Ransom") is a single man living in Nevada. See Ransom v. MBNA, 577 F.3d 1026, 1027 (9th Cir. 2009). In 2006, he had $82,542.93 of unsecured debt, mostly on credit cards, including $32,896.73 owed to MBNA America Bank ("MBNA"). See Id. In order to discharge his debt, Ransom filed for personal bankruptcy under Chapter 13 of the bankruptcy code on July 5, 2006. See Id.
Chapter 13 allows debtors to discharge their debt after a completing a repayment plan approved by creditors. See 11 U.S.C. § 1321. During the repayment period, debtors make monthly payments they are able to afford, but are not expected to repay all of their debt. See Ransom, 577 F.3d at 1028. However, a bankruptcy judge may approve a repayment plan over the objections of creditors, but only if the judge is convinced that the debtor’s entire disposable income is committed to the monthly payments. See 11 U.S.C. § 1325(b)(1)(B). A debtor's income and expenses are calculated from the debtor's finances at the time of filing. See Ransom, 577 F.3d at 1028.
This case concerns the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), which was designed to enable creditors to collect the maximum possible repayment, to reduce bankruptcy abuse, and to still allow debtors to discharge debts they would not otherwise be able to repay. See Ransom, 577 F.3d at 1030–32. As part of the BAPCPA, Congress incorporated the Internal Revenue Service Local Standards ("Standards") for calculating a debtor’s disposable income. See Id. at 1028–30.
The Standards list expenses, adjusted by region, that debtors may deduct from their incomes to determine their "projected disposable income." See Ransom, 577 F.3d at 1028–30. Among the expenses listed are "Ownership Costs" and "Operating Costs & Public Transportation Costs," neither of which is defined by the Standards maintained by the U.S. Trustee Program. See Ransom v. MBNA, 380 B.R. 799, 803 (B.A.P. 9th Cir. 2007). The IRS limits Ownership Costs in its Collection Financial Standards ("CFS") to lease or loan payments. See Brief for Respondent, MBNA America Bank N.A. at 32. However, while the BAPCPA explicitly incorporates the Standards, it never mentions the CFS. See 11 U.S.C. § 707(b)(2).
Ransom has an annual income of $50,982.72, which makes him an above-median income debtor. See Ransom, 577 F.3d at 1027. After filling out the necessary forms, he declared a disposable monthly income of $210.55, including a $471 vehicle ownership deduction, and proposed a repayment plan of $500 a month for five years. See Id. At the time, Ransom owned his 2004 Toyota Camry outright and did not make any monthly payments on the vehicle. See Id. As a result, MBNA objected to Ransom’s claim for the vehicle ownership deduction, and insisted that he pay $681.55 a month. See Id.
The bankruptcy court held that a deduction for ownership expenses may only be claimed by debtors with loan or lease payments, and did not confirm Ransom's repayment plan. See Ransom, 380 B.R. at 808–09. The United States Bankruptcy Appellate Panel for the Ninth Circuit affirmed the lower court’s opinion. See Id. Ransom appealed to the Ninth Circuit Court of Appeals, which affirmed the bankruptcy appellate panel’s decision. See Ransom, 577 F.3d at 1032.
The Supreme Court granted certiorari on April 19, 2010 to resolve a split among the circuit courts regarding vehicle ownership deductions for vehicles owned outright. See Ransom v. MBNA, 130 S.Ct. 2097 (2010).
Analysis
Ransom contends that the vehicle ownership deduction to disposable income is allowed when a Chapter 13 debtor owns a vehicle, whether or not the debtor has a loan or lease payment for the vehicle. The Fifth, Seventh and Eighth Circuits support Ransom’s position. See Brief for Petitioner, Jason Ransom at 8. Ransom argues that the calculation for disposable income focuses on future projected disposable income and thus Ransom would be entitled to the vehicle ownership deduction even though he does not have a current loan or lease payment. See Id. at 9. MBNA replies that a plain reading of the BAPCPA does not permit a deduction without a loan or lease obligation. See Brief for Respondent, MBNA America Bank N.A. at 18.
Statutory Interpretation
Ransom relies on a careful examination of the means test to justify an ownership deduction. See Brief for Petitioner at 24. The means test is detailed in Chapter 7 of the bankruptcy code and is used as a method to determine the amount of the debtor’s disposable income to be utilized for the repayment of outstanding debt obligations. See Id. at 8–9. Disposable income is determined by reducing the monthly income of the debtor by the amount needed to reasonably support the debtor. See Id. The actual amount calculated for a deduction of disposable income for transportation expenses is determined by using the amounts listed in the Internal Revenue Service Local Standards ("Standards"). See Id. at 25. Ransom argues that the amount listed in the Standards is the actual amount that the debtor is allowed to use as a vehicle ownership deduction. See Id. The alternative approach rejected by Ransom views the ownership expense deduction amount listed in the Standards as the maximum deductible amount permitted by law. See Id. at 25–26. A debtor could be required to claim an ownership deduction lower than the listed amount in the Standards. See Id. In support of the position that the amount listed in the Standards is the actual amount that a debtor deducts, Ransom cites the Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States. See Id. at 28–29. The Advisory Committee argues that the actual specification of amounts is the actual deduction and not a maximum that can be deducted. See Id.
Furthermore, Ransom contends that the Ninth Circuit incorrectly used the Internal Revenue Manual ("IRM") as a basis to deny the deduction. See Brief for Petitioner at 42–43. The IRM denies an ownership cost deduction where there is no loan or lease payment. See Id.However, Ransom notes that the bankruptcy statute does not refer to the IRM or the Financial Analysis Handbook. See Id. at 43–45. Absent any reference to the IRM or Financial Analysis Handbook, Ransom contends that the language of the statute allows for the deduction. See Id.
MBNA responds by arguing that the law does not permit a deduction for vehicle ownership expense when the vehicle is not secured by a lease or loan. See Brief for Respondent at 25. Specifically, MBNA contends that the plain text of the relevant statute does not permit a deduction when there is no payment. See Id. MBNA argues that the ordinary meaning of "applicable" vehicle ownership expense does not apply if there is no vehicle ownership expense in the form of monthly payments on the vehicle. See Id. at 26–27. Thus, MBNA argues that the use of the language "actual" or "applicable" precludes Ransom from claiming the expense, and means that the listed deduction amount does not apply to debtors who do not have payments on their vehicles. See Id. at 28–29.
Furthermore, MBNA contends that the statute explicitly incorporates the Collection Financial Standards ("CFS") as a guide to determine the applicability of deductions. See Brief for Respondent at 31–32. The CFS provides guidance on how to interpret the Standards, without which the table detailing the transportation expense deduction cannot be utilized based on the materials included in the Standards. See Id. Specifically, there is a lack of clarity as to what the table refers to and how it applies to the debtor. See Id. However, MBNA states that an expense for a car payment is not allowed by the CFS. See Id. MBNA argues that additional support for denying the deduction is found in the Internal Revenue Manual. See Id. at 35. Although the manual is not directly referenced in the statute, MBNA argues that it is implicitly incorporated into the statute. See Id.MBNA also notes that the Internal Revenue Manual is explicitly cited in the statute’s legislative history. See Id. at 36.
Purpose of the BAPCPA is the Repayment of Debt
The Ninth Circuit determined that a deduction reducing disposable income for a vehicle ownership expense would be inaccurate and unfair to the creditors if there were not an actual lease or loan payment burden that the debtor had to fulfill. See Brief for Petitioner at 49–50. However, Ransom notes that the means test does not consider payments for debts in calculating the monthly expense used to reduce the debtor’s disposable income, and argues that this undercuts the Ninth Circuit’s reasoning. See Id. at 51. Furthermore, Ransom argues that there is an actual cost of ownership of a vehicle, such as maintenance costs and repairs, cost of vehicle replacement, and vehicle depreciation that creates a need for a debtor who owns a vehicle to be able to deduct the transportation ownership expense, regardless of whether there are payments on the vehicle. See Id. at 51–52.
Moreover, Ransom contends that Ninth Circuit improperly denied the deduction on the grounds that the vehicle expense deduction should not apply when there is not a specific vehicle obligation. See Brief for Petitioner at 54–55. Ransom argues that Ninth Circuit incorrectly reasoned that limiting the deduction will support the repayment of debt but failed to consider that limiting the deduction will discourage repayment of transportation-related debts. See id. Ransom argues that the Ninth Circuit’s decision undermines the BAPCPA’s principle purpose of debt repayment by reducing the incentive to repay debts. See id.
MBNA also raises the point that the BAPCPA’s purpose is to maximize the repayment of debts to creditors. See Brief for Respondent at 42. However, MBNA argues that allowing a transportation deduction when there is no car loan or lease payment artificially reduces the debtor’s disposable income, inaccurately reflecting the debtor’s ability to repay his debts, and will lead to creditors receiving less than they should. See Id. at 42–43. Thus, MBNA contends that the deduction should not be permitted. See Id.
Discussion
The question of whether an above-median debtor can claim an ownership expense for a vehicle owned free and clear has divided the courts. The Fifth, Seventh, and Eighth Circuits side with Ransom, agreeing that an above-median debtor may claim ownership expenses on a vehicle owned outright, while the Ninth Circuit sides with MBNA, holding that the expense cannot be claimed. See Ransom v. MBNA, 577 F.3d 1026, 1029–32 (9th Cir. 2009). The Supreme Court’s decision will resolve this growing split, and provide guidance to debtors, creditors, and courts faced with vehicle ownership costs in future Chapter 13 bankruptcy cases.
Creditors’ Rights
MBNA argues that allowing the vehicle ownership deduction for debtors who own their own vehicles would prevent creditors from collecting their debts to the fullest extent possible. See Brief for Respondent, MBNA America Bank, N.A. at 50. The United States further contends that in passing the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), Congress sought to ensure that debtors pay as much of their debts as possible, and that allowing debtors to claim ownership expenses on vehicles they have already paid for in full, would subvert this goal. See Brief of Amicus Curiae United States of America in Support of Respondent at 23–24.
On the other hand, Ransom argues that disallowing the deduction would prevent at least some debtors from being able to repay their debts at all. See Brief for Petitioner, Jason Ransom at 60–61. Ransom claims that, in his case, denying the ownership deduction would lead to higher monthly payments than he can afford, which in turn would lead to a plan that cannot be confirmed. See Id. Ransom suggests that this, in turn, would mean that his creditors would not receive the maximum repayment on their loans, subverting Congress’s goals in passing the BAPCPA. See Id. Therefore, Ransom argues, allowing debtors who own their vehicles to claim the deduction will ensure that creditors will be repaid to a fuller extent under Chapter 13 plans than the Ninth Circuit’s ruling would allow. See Id.
Fairness to Debtors
The National Association of Consumer Bankruptcy Attorneys (“NACBA”) argues that denying the ownership deduction to debtors who own their vehicles in full fails to take into account ownership expenses aside from monthly loan payments that vehicle owners regularly incur. See Brief of Amicus Curiae National Association of Consumer Bankruptcy Attorneys (“NACBA”) in Support of Petitioner at 25. The NACBA points out that car owners may need to pay for major repairs to their cars, or even purchase a new car within the standard 5-year Chapter 13 plan period. See Id. Furthermore, the NACBA points out, denying the ownership deduction ignores the fact that vehicles depreciate in value over time. See Id. Countering this argument, MBNA contends that debtors needing to replace or repair their cars during the plan period may seek modification of their repayment plans. See Brief for Respondent at 41.
The United States argues that allowing the vehicle ownership exemption for above-median debtors who own their vehicles outright would lead to disparate treatment of above-median and below-median debtors by the bankruptcy code. See Brief of the United States at 27. The United States explains that below-median debtors must prove that each deducted expense is reasonably necessary, which would include claimed vehicle ownership expense. See Id. By allowing above-median debtors who own their vehicles and may never incur ownership expenses to claim the ownership exemption without showing that the expense is reasonably necessary, the United States argues, the Court would be creating a loophole for above-median debtors – precisely the class of debtors that the BAPCPA scrutinizes. See Id.
Efficiency
The NACBA argues that in passing the BAPCPA, Congress was also concerned with streamlining the bankruptcy process, and that preventing debtors who own vehicles from claiming the ownership exemption, regardless of whether they must make payments on the vehicle or not, frustrates this goal. See Brief of NACBA at 22. The NACBA argues that, like other allowed expenses, the ownership expense is a standardized expense and that if it is consistently allowed, it would alleviate the burden of returning to bankruptcy court should the debtor replace a vehicle or incur substantial repair costs during the course of a five-year plan. See id. at 23. The U.S. argues that because a debtor must already show that she or he owns a car, an inquiry into whether the debtor is actually making payments would not lead to increased or burdensome litigation. See Brief of the United States at 20, 26. G. Eric Brunstad, Jr. argues that the amounts of allowable expenses adopted by the BAPCPA are maximum reasonable expenses, not automatic deductions, and that mechanically allowing the expenses would reduce the amount creditors receive through the bankruptcy process. SeeBrief of Amicus Curiae G. Eric Brunstad, Jr. in Support of Respondent at 11–13.
Conclusion
Ransom views the vehicle ownership deduction separate from any specific obligation attached to the vehicle. MBNA links the deduction to a specific lease or loan obligation on the vehicle. The lack of clarity in the statute will require the Court to examine congressional intent within the framework of current bankruptcy law and the complicated policy results that will follow from a decision either way. The Court’s decision in this case will provide guidance as to whether the vehicle ownership deduction is available to debtors even if the vehicle is not linked to a specific obligation.
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Additional Resources
· Bankruptcy Case Blog, Tracy Keeton: A Fork in the Road: Courts Split on Transportation Ownership Deductions (Apr. 6, 2010)