Chickens in the Pot, Cars in the Garage, and Turkeys in the Law

The 2005 bankruptcy amendments never cease to amaze me. Yesterday, we covered the means testing requirements in my bankruptcy class. I required the students to fill out the means testing forms using the information from a problem in the textbook. For the bankruptcy professors out there, this appears to have been an effective way to teach the material. For the nonbankruptcy types out there, the means test is a congressionally mandated comparison of income and expenses to determine whether a debtor is eligible for chapter 7. To do this comparison of income to expenses, Congress directed that the bankruptcy courts should use IRS guidelines developed to determine whether a taxpayer could afford to repay a delinquent tax debt.

Unfortunately, I have to dig a little bit into the details to make my point. Currently, the IRS guidelines allow $471 in monthly payments for the ownership of "Vehicle 1" and $332 in monthly payments for the ownership of "vehicle 2." In our problem, the married couple owned two automobiles. On one auto they made a $610 monthly payment, and they were no longer making payments on the other auto. It matters not that they one vehicle free and clear. Under the IRS guidelines and the Bankruptcy Code, they were allowed to make two deductions as the ownership costs of having two vehicles. Here comes the rub. The auto lenders wanted Congress to make sure bankrupt debtors would still make that full monthly payment even after filing bankruptcy. Hence, under the bankruptcy law but not the IRS guidelines, the debtors could deduct the full $610 monthly payment they were actually making.

Demonstrating why I am teaching law instead of practicing, I allocated the $610 payment to "vehicle 1" and claimed the statutory minimum of $332 on "vehicle 2." "Vehicle 1" means the newer, more expensive car, right? A student gently pointed out that definition was specified nowhere in the Bankruptcy Code or IRS guidelines. Indeed, the issue does not arise under the IRS guidelines because the amounts operate as caps, not minimums. If instead we designated the $610 payment to "vehicle 2," we get to use the statutory minimum of $471. Because one generally loses eligibility if there is $100/month left to pay creditors, the difference between a statutory minimum of $471 and $332 could be dispositive.

By this point in the post, I suspect everyone has left the blog for other reading material. (I strongly recommended this from The Onion: "Florida State University To Phase Out Academic Operations By 2010.") If you have hung on, there is a bigger point. What did Congress think it was doing by incorporating these IRS guidelines into chapter 7? They are unworkable. Indeed, the reason that it is pedagogically effective to make the students fill out the forms is that it forces them to grapple with the minutiae of the statute and see the problems created by the 2005 amendments. Political forces swirled around the amendments' enactment. Even if the amendments were not a policy disaster, they are a technical nightmare in their implementation. See Katie Porter's excellent post on a related point.

Comments

[Jeff Paulsen]

Try this one:

The U.S. Trustee seems to have taken the position that if you are not actually making payments on your automobile, you only get to claim the operating costs, not the ownership costs. Thus, if you own two cars outright, then you get nothing for the ownership allowance. Can you figure out where it says that in the Code? I can't. This just seems to punish people who are frugal and don't buy a fancy new car on the eve of bankruptcy.

As if to make up for taking this position, the UST is apparantly allowing a $200 ownership allowance for a car owned outright if they are over 6 years old and/or they have (if I remember correctly) 75,000+ miles on them. The basis for this seems to be the IRS Manual, Chapter 5.8.5.5.2. Fun stuff.

[dammitboris]

Judge Williamson in the MD Florida has created an Excel sheet that completes the means test, if it will help anyone...

http://www.flmb.uscourts.gov/calculator.htm

[Ken Doran]

As a consumer bankruptcy practioner who gets to guess my way through means test calculations in real life, I did not bail out early on your post; and your student makes an interesting point I handn't thought of. I will post it at NACBA.

[Katie Porter]

Bob Lawless' point about the amendmdents being a technical nightmare to implement suggests another less obvious consequence of BAPCPA. Figuring out how to implement these new provisions is going to fall in the first instance on the US Trustee. Every ambiguity in the new legislation (and there are lots) creates an opportunity for the US Trustee to assert a position and claim it is the authoritative or definitive way to read the statute. This raises interesting analogies to concerns about administrative agencies overreaching their power with more traditional agencies. I hope to blog about this in more length soon.

I had my students do the same assignment last fall--when we knew even less about how to use these forms, and one student explain about halfway through the class: "This is worse than the Internal Revenue Code and the federal securities laws put togehter." I thought he was going to cry in frustration. No comment on how I felt as the teacher at that point!

[Jeff Paulsen]

The thing that gets me about the Means Test is the sheer amount of input the software companies have. In "Myth of the Dissapearing Business Bankruptcy", the role of automated software was offered as a possible reason for...well, the dissapearance of business bankruptcies. If true, that's the result of just one radio button in each software. Have you seen any of the commercial software that debtor attorneys are using for the Means Test? (Best Case, which I am familiar with, has a free demo at www.bestcase.com/download.htm.) There's a lot more than one radio button.

[Rafael Pardo]

Following the position of the U.S. Bankruptcy Courts for the Northern District of Texas (338 B.R. 718) and the Western District of Missouri (342 B.R. 608), the U.S. Bankruptcy Court for the District of Oregon has held, in the context of calculating the projected disposable income of an above-median-income Chapter 13 debtor, that such a debtor cannot deduct the vehicle ownership expense provided for by the IRS standards if the debtor owns the vehicle free and clear. See In re Carlin, 2006 WL 2398750 (Bankr. D. Or. Aug. 18, 2006) (to be published in B.R.).

[Bob Lawless]

Wow. I had no idea these cases existed. The cases that Professor Pardo cites find no support in the Bankruptcy Code. I don't see anything in the statute that would reach that result. The statute says use the IRS guidelines, and the guidelines give an ownership deduction for vehicle 1 and vehicle 2. If these cases are right, a debtor who owes $1 on the vehicle gets a deduction but the debtor who has paid off the loan does not. A Credit Slips reader sent me a case (In re Fowler, Case No. 06-10207 (Bankr. D. Del. Sept. 11, 2006) saying that the statute clearly allows two deductions if the debtor owns two vehicles, regardless of the balance on the loans on the vehicles. It seemed like a no brainer to me.

[Gary Neustadter]

There are some additional cases holding that the debtor cannot claim the ownership expense if he/she is making no car payments. See, e.g., In re McGuire, 342 B.R. 608 (Bankr. W.D. Mo. 2006) (Chapter 13 case for above median debtor requiring calculation of disposable income using means test, but debtor may amend plan if later needs to buy car). The court relied on a statements in the Internal Revenue Manual that a taxpayer cannot claim the ownership expense absent a car payment. That would resolve the problem suggested in the blog post: if one allocates the $610 payment to vehicle 1, leaving a net ownership expense of $0 for vehicle 1, one cannot then claim the ownership expense of $332 attributable to the second vehicle that the debtor owns free and clear; conversely, if one allocates the $610 payment to vehicle 2, leaving again a net ownership expense of $0 for vehicle 2, one cannot then claim the ownership expense of $471 to the other vehicle that the debtor owns free and clear. Too bad. It was fun to think of how the debtor might have manipulated the ownership expense.

[Patricia Hammel]

I just received my first "notice of abuse under sec. 707(b) from the US Trustee, Western District of Wisconsin. Clients have two cars, both over 10 years old, both over 230,000 miles. Were allowed $200 each by UST on Mean(s) Test. No ownership allowance, which resulted in them failing the disposable income test (wife made nearly $70K per year at job she lost in 2005; failure of means test occurred after her unemployment ran out and was still unemployed when filed in September). We get to choose between litigating the issue and converting to Ch. 13 (UST made it clear that if they lose, will appeal). I try to fill these things out as well as I can, but get blindsided by the US Trustee. Also, they "did a tax return" for these debtors and determined that they are withholding too much income tax!?