Available at: https://scholarlycommons.law.emory.edu/ebdj/vol42/iss2/1
Abstract:
With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress adopted for the first time a standardized income-based test for measuring an individual debtor’s “disposable income,” which is the amount a debtor must pay to unsecured creditors in a chapter 13 proceeding. Under the means test, debtors calculate their disposable income by deducting from income various standard expenses established by the Internal Revenue Service. One of those standard expenses is a vehicle ownership expense, which debtors can deduct if they have auto loan or lease payments.
This Article is about bankruptcy courts who deny the car ownership expense to some debtors based on a mere technicality and an incorrect interpretation of the U.S. Supreme Court’s holding in Ransom v. FIA Card Services, N.A.
Imagine that twin brothers file a Chapter 13 case. Prior to filing, Ron obtained an auto loan to finance the purchase of a pre-owned vehicle and granted his lender a perfected security interest in that vehicle. Don borrowed the same amount from a car title lender, which obtained a perfected security interest in a vehicle that Don already owned. Don used the loan to pay off medical bills. If Ron is allowed to take a standard deduction of $500 for car ownership expenses, but Don is not, Ron’s disposable income will be much lower than his twin brother’s disposable income. Ron’s lender has a purchase-money security interest ("PMSI") while Don’s lender has a non-PMSI. However, both Ron and Don must repay the lenders, or else the brothers will lose possession of their vehicles. Both lenders enter the bankruptcy legal system with their rights intact under the Uniform Commercial Code and both experience equality of treatment, one of the fundamental goals of the bankruptcy system. However, only Ron—the debtor with the PMSI auto loan—benefits from a fresh start, the other fundamental goal of the bankruptcy system. Because debtors with PMSI loans as well as non-PMSI loans must repay the loans to keep their vehicles, both groups should be allowed to take the ownership expense deduction, in accordance with the Ransom holding.
Congress should amend BAPCPA to allow debtors with non-PMSI loans to take the car ownership expense deduction and receive the full fresh start Congress intended for them. Otherwise, such debtors will be required to pay artificially inflated disposable incomes, will most likely struggle to make, and occasionally miss, payments for the duration of their plans—or even worse, be forced to surrender their means of getting to and from work.
Summary:
Professor Creola Johnson's thoughtful article examines an increasingly important split among bankruptcy courts over one deceptively simple question: when a Chapter 13 debtor has a loan secured by a vehicle, but that loan was not used to purchase the vehicle, may the debtor still claim the IRS vehicle ownership deduction under the Means Test?
Johnson argues that the answer should be yes.
The controversy generally arises with auto title loans, vehicle refinance loans, and other non-purchase-money security interest (non-PMSI) loans. Although these loans are secured by the debtor's vehicle and must be paid if the debtor hopes to keep that vehicle, a growing number of bankruptcy courts have concluded that they do not qualify for the ownership expense deduction because the debt was not incurred to purchase the vehicle itself.
Johnson contends that these courts have misread both the Bankruptcy Code and the Supreme Court's decision in Ransom v. FIA Card Services. She notes that neither § 707(b)(2), the IRS Local Standards, nor Official Form 122C-2 distinguishes between purchase-money and non-purchase-money vehicle loans. Instead, the official bankruptcy forms simply ask whether the debtor is making loan or lease payments on the vehicle. If the answer is yes, the deduction should apply.
Much of the article focuses on decisions such as In re Alexander, In re Carroll, In re Traylor, and In re Litton, which denied the deduction by relying heavily upon IRS manuals and collection materials rather than the statutory language itself. Johnson argues those materials were designed for tax collection—not bankruptcy—and that Ransom expressly cautioned that they cannot override the Bankruptcy Code when inconsistent with its language.
Johnson also highlights the practical consequences. In one example, denying the deduction increased a debtor's projected disposable income from only $85 per month to over $500 per month, increasing required plan payments by more than $25,000 over five years. Such results, she argues, make Chapter 13 plans more difficult to complete and undermine the fresh start that bankruptcy is intended to provide.
The article concludes that if the Supreme Court does not resolve the current split, Congress should amend the Means Test to expressly permit the deduction for all vehicle-secured loans, regardless of whether the security interest is purchase-money or not.
Commentary:
This is an excellent statutory interpretation article that addresses a narrow issue with surprisingly broad consequences.
Professor Johnson correctly recognizes that the Means Test was intended to create standardized deductions rather than invite courts to relitigate every expense on a case-by-case basis. Congress replaced much of the judicial discretion that existed before BAPCPA with objective IRS standards. Whether one likes that policy or not, courts should generally apply the statute Congress enacted—not improve upon it.
Her textual argument is particularly persuasive. Section 707(b)(2) says nothing about purchase-money security interests. Official Form 122C-2 likewise asks only whether the debtor is making loan or lease payments on the vehicle. Courts that import a PMSI requirement are arguably adding language Congress chose not to include.
The article is also a reminder that Ransom was a much narrower decision than some courts have treated it. The Supreme Court held that debtors who own a vehicle free and clear cannot deduct ownership costs because they have no ownership payment. That is quite different from a debtor who must continue making payments on a vehicle-secured loan in order to avoid repossession. The latter debtor plainly has an ownership-related payment, even if the loan proceeds were used for medical bills, home repairs, or some other emergency rather than to purchase the vehicle itself.
Where I become somewhat more skeptical is the author's proposed solution that Congress amend BAPCPA.
Perhaps Congress should. But after more than twenty years of living with BAPCPA, experience suggests that waiting for Congress to clarify consumer bankruptcy law is usually an exercise in frustration. More often than not, legislative "clarifications" either never happen or produce new ambiguities and unintended consequences. Consumer bankruptcy practitioners have become accustomed to relying on careful statutory interpretation rather than expecting legislative rescue.
Fortunately, this issue may not require congressional action at all. It is fundamentally a question of statutory interpretation, making it an excellent candidate for eventual resolution by the courts of appeals—or perhaps the Supreme Court itself if the split continues to develop.
For consumer bankruptcy attorneys, this article is well worth reading. Even practitioners who never encounter an auto title loan should understand the broader principle at stake. The Means Test works best when standardized deductions are actually standardized. Once courts begin reading unwritten limitations into those deductions, predictability suffers, litigation increases, and debtors' ability to achieve a meaningful fresh start becomes less certain.
Ultimately, Professor Johnson has made a compelling case that bankruptcy courts should resist adding requirements that Congress did not write. Whether one agrees with every aspect of her analysis, the article is an important contribution to the continuing debate over how the Means Test should operate and how faithfully courts should adhere to the statutory text.
To read a copy of the transcript, please see:
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