United States Supreme Court to Decide Yet Another Bankruptcy Appeal

Published on Sep 14, 2010 at 5:48 pm in General Blogs.

Bankruptcy lawyers are quick to note that the Supreme Court has been very busy recently deciding bankruptcy appeal after bankruptcy appeal. And should they be surprised? After all, the way the new law was written, the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), is it any wonder that bankruptcy judges across the Nation are deciding issues in directly opposite ways? From hanging paragraphs, to unclear definitions, to debt relief agencies, to hanging chads no one should be surprised when Circuit Courts of Appeals’ decisions are being handed down that directly contradict each other. When this happens, it becomes time for the Supreme Court to step in and rectify the split in those opinions.

The most recent bankruptcy case installment up for Supreme Court review is the case of In re Ransom, Ransom v. MBNA, America Bank, Docket No.: 09-907, 577 F.3d 1026 (9th Cir. 2009), cert granted, 2010 U.S. LEXIS 3359 (2010). The Supreme Court will revisit the means test in this latest bankruptcy appeal. As spoken about in my prior blogs: In 2005, the Bankruptcy Code was overhauled by Congress. BAPCPA brought with it many changes, aiming to make it more difficult for people to eliminate debt entirely in a Chapter 7 case and forcing many debtors to pay back a portion of their debt in a Chapter 13 reorganization. One of the biggest changes BAPCPA brought about was the inclusion of form B22, more commonly known as the “means test”. This form was intended by Congress to be used to determine how much a person can afford to pay back their creditors. The means test employs Internal Revenue Service expense standards that are to be deducted from a debtor’s income in order to determine the amount a debtor should be able to afford to pay back their creditors, otherwise known as the “projected disposeable income”. The IRS standards are derived from Local and National standards regarding a number of living expenses such as food, electricity, mortgage/rent, house upkeep, car payments, car insurance, car maintenance and so on. The IRS sets allowable expense figures for every part of the Country to determine how much a person can afford to pay back the IRS when considering tax offers and compromise or repayment of a person’s tax liabilities. BAPCPA simply adopted the IRS standards and imported those standards to the world of bankruptcy.

At issue in Ransom is whether or not a bankruptcy court may allow a debtor, that must complete the means test to determine his projected disposeable income, the ability to claim the IRS allowable ownership cost deduction for a vehicle, if the Debtor actually does not make a payment for that vehicle. The Ninth Circuit held that a debtor could only claim a vehicle ownership expense on the means test if she had a debt or lease payment. The Fifth, Seventh, Eighth Circuits, and the Sixth Circuit BAP have all ruled that the ownership expense is available regardless of whether or not there is an actual payment on the vehicle. In re Washburn, 579 F.3d 934 (8th Cir. 2009)(with dissenting opinion); Tate v. Bolen, 571 F.3d 423 (5th Cir. 2009); In re Ross-Tousey, 549 F.3d 1148 (7th Cir. 2008); In re Kimbro, 389 B.R. 518 (6th Cir. BAP 2008). What is interesting about this appeal is the fact that when Congress re-wrote the Bankruptcy Code in 2005, the means test was created to refer to the Local Standards, National Standards and Other Necessary Expenses referred to by the Financial Analysis Handbook found within the Internal Revenue Manual. The manual itself provides guidelines for applying the standards and specifically states that the ownership cost deduction is only available if the tax payer is making an actual car or lease payment on that vehicle. As such, the Supreme Court’s opinion will decide upon the interpretation of whether the availability of the deduction depends on how Congress wrote this means test item, with no indication of when a debtor can or cannot claim the deduction or whether or not the availability of the deduction refers to how the IRS would have applied the standards under the Internal Revenue Manual. Another battle between the plain meaning of the statute versus Congress’ intent seems to be shaping up, once again.

If the deduction under these circumstances is allowed, then the debtor would of course have to payback less to his unsecured creditors.

In closing, stay tuned for developments on ths issue as it will impact bankruptcy practice across the land. Lastly remember one thing, the Supreme Court, the most hallowed Court of the Land, in my opinion is not the final judicial authority because it is infallible, instead the Supreme Court is infallible because it is the absolute final judicial authority.



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