Bankruptcy Law

The U. S. Supreme Court held 8-1 that if a chapter 13 debtor wants to take the standard automobile "ownership cost" as a deduction from income in computing the disposable income that must be devoted to repayment of creditors in a chapter 13 plan, he or she must owe money for the purchase or lease of the vehicle(s) involved at the time the case is filed.  In its 2005 amendments to the Bankruptcy Code, Congress directed that when computing disposable income, debtors must use certain IRS tables for to determine the amountof "debtor's applicable monthly expense amounts."   "Applicable" was the key term that required interpretation in this case.  The IRS splits vehicle expenses into separate categories of "ownership" and "operating" costs.  The standard amount for "ownership costs" is determined by the IRS from data on monthly loan and lease payments.  A separate standard amount for "operating costs" is derived from all other vehicle expenses (e.g., maintenance).  The circuits had split on how to interpret "applicable" in this context.  Some had ruled that "applicable" meant that the ownership expense must actually exist; others, that "applicable" merely directed use of the amount that corresponded to the debtor's situation in the IRS table (e.g., ownership of 1 car, 2 cars, etc.).  The Supreme Court ruled that the first reading of "applicable" comported better with the text and purpose of the statute than the second.   The Eighth Circuit had ruled the other way, connecting "applicable" with the proper category of the IRS table rather than with the existence of loan or leasing obligations.  The Supreme Court's ruling prevented Mr. Ransom from "sheltering" (the Court's term) approximately $28,000 of his income from creditors over the life of his plan.

The Missouri Bar Courts Bulletin, 11-Feb