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U.S. Supreme Court: Chapter 13 Debtor Who Does Not Make Loan or Lease Payments Cannot Deduct Vehicle Ownership Expenses

Ransom v FIA Card Services, NA, Supreme Court of the United States, Jan. 11, 2011 (Case No. 09-907).

In the first opinion authored by Justice Elena Kagan, the Supreme Court of the United States held that a Chapter 13 debtor who owns a vehicle outright and thus does not make loan or lease payments cannot include vehicle ownership costs in his or her monthly expenses for purpose of the means test.

Under BAPCPA, debtors in Chapter 13 cases must follow a formula to calculate their disposable income - that is, the amount that the debtor must use to pay creditors under a court-approved Chapter 13 plan. To determine disposable income, the debtor deducts certain "reasonably necessary" expenses from his or her monthly income. Those reasonably necessary expenses, which are outlined in the IRS's "National and Local Standards," include allowances for vehicle ownership and operating costs.

When Jason Ransom filed his Chapter 13 case, he owned a vehicle free of any debt. But in completing the means test, Ransom listed both ownership and operating costs for the vehicle. The ownership deduction was $471, which was the maximum amount allowed under the IRS's standards at that time. Including that expense reduced the amount of Ransom's disposable income and thus reduced the amount he would have to pay to creditors. A creditor objected, and Ransom's plan was not confirmed.

The Supreme Court agreed with the creditor and held that Ransom could not include vehicle ownership costs for a vehicle that he owned outright. The Court looked to Section 707 of the Bankruptcy Code, which states that a debtor's monthly expenses are the "applicable" monthly expense amounts identified in the IRS's standards. Applying the ordinary meaning of the word "applicable" (appropriate, relevant, suitable, or fit), the Court found that an ownership deduction was not "applicable" for Ransom because he did not have any car payments. The Court further reasoned that one purpose of BAPCPA is to ensure that debtors repay their creditors as much as they can afford.

Ultimately, the Court concluded that the vehicle ownership deduction applies to "the costs of a car loan or lease and nothing more." Id. at 9. Other vehicle expenses, such as insurance, maintenance, and fuel, are covered by the separate "operating" expense allowance. This case offers direction for Chapter 13 debtors and their attorneys and clarifies that the IRS's standard allowances do not automatically apply. The debtor must actually incur the expenses that are deducted.

Categories: Chapter 13, U.S. Supreme Court

Photo of Laura J. Genovich

practice focuses on bankruptcy, municipal law, collections, and trial-level and appeals litigation. In the bankruptcy arena, she represents primarily Chapter 7 trustees. Laura has handled a wide range of trial and appellate matters for individual and business clients and has appeared before the U.S. Sixth Circuit Court of Appeals, the Michigan Court of Appeals, and the United States Bankruptcy Court for the Western District of Michigan, as well as Michigan circuit and district courts across the state.

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