Today the U.S. Supreme Court gave us another interpretation of the how the means test should be used in bankruptcy cases by deciding that only consumers who have car loans or car leases can claim a certain motor vehicle “ownership expense” deduction on the means test.
Justice Elena Kagen, in her very first decision since ascending to the Supreme Court, ruled in an eight-to-one opinion that the BAPCPA means test is designed to enable creditors to recover as much as possible while ensuring that consumers seeking bankruptcy relief have enough money to maintain a reasonable standard of living.
The case, Ransom v.F.I.A.Card Services, N.A., had been frequently discussed at national bankruptcy symposiums that I’ve attended during the past year. Even though the case is not a victory for the consumer (it is basically a win for the credit card companies), it was not unexpected either. The Supreme Court upheld the decision of the U.S. Court of Appeals for the Ninth Circuit.
Ransom Case Now Governs Who Can Take Ownership Expense Car Deduction on Means Test
What the case means is that only consumers who have a car loan or car lease can take an additional deduction on the means test that car owners whose vehicles are totally paid off cannot take.
This additional means test deduction can sometimes be significant in enabling a consumer to either pass the means test in a Chapter 7 case or pay substantially less in a Chapter 13 case.
The Ransom decision does not change local practice here in New York at all, as consumer bankruptcy practitioners here have customarily only taken the vehicle ownership expense deduction when the consumer debtor had a car loan or lease.
In her ruling, Justice Kagan sought to interpret the language of the means test statute, which provides that a debtor may claim only “applicable” expense amounts. While the law does not define applicable, the Justice cited dictionary definitions such as relevance and appropriate.
In her decision, Justice Kagan also relied on the “statutory context” that in chapter 13 bankruptcy cases, means testing deductions fill in “amounts reasonably necessary to be expended” by above-median-income debtors.
Finally, Justice Kagan noted that bankruptcy law has a “core purpose of ensuring that debtors devote their full disposable income to repaying creditors.”
What Can Consumer Debtors Do to Get Around the Ransom Decision?
Here is how some bankruptcy debtors who do not have financed vehicles, side-step the issue so that they can obtain the additional means test deduction. Instead of keeping an older, non-financed vehicle, they trade it in for a newer car that is financed by a loan or lease. They do this prior to filing for bankruptcy.
Assuming that they engage in this “pre-bankruptcy planning” in good faith, and that they truly need a newer, more-reliable vehicle, then no one should be able to argue that engaging in such a transaction is abusive bankruptcy conduct.
Even Keeping an Older, Non-Financed Car, Results in an Additional Means Test Deduction
In our jurisdiction, the U.S. Trustee permits debtors to utilize a certain additional IRS used car deduction if the debtor’s car is an older car, which is one which is at least six years old. This is because a good part of the means test deductions are based on IRS cost of living deductions.
If a debtor has an older car, then the debtor can take an additional $200 deduction on the means test. This applies even if the car is financed, in which case the debtor can get a double deduction.