Seventh Circuit Decides Hotly Debated Means Test Issue

One of the more divisive post-BAPCPA consumer issues has been whether a debtor who has no monthly vehicle loan or lease expense can claim a vehicle ownership deduction when applying the means test. Until Wednesday, no circuit court of appeals had considered the issue. The four bankruptcy appellate panels that had rendered opinions were evenly split, as were the bankruptcy courts. Now the Seventh Circuit Court of Appeals has weighed in on the issue in In Ross-Tousey v. Neary, 2008 WL 5234070 (7^th Cir. Dec. 17, 2008). The court reversed the district court and held that when conducting a means test analysis a debtor may claim a vehicle ownership expense even if the vehicle is not encumbered by a debt or lease payment. According to the court of appeals, this result was dictated by the plain language of the statute, the legislative history, and the underlying policies of the means test.

The importance of the decision extends beyond the car ownership allowance.

The court rejected the methodology used in the Internal Revenue Manual (IRM) as an interpretive guide for the means test. While the IRM is useful to IRS agents determining a taxpayer’s ability to pay, the court found no indication the Congress intended the IRM to be used in conducting the means test. The substantial discretion of IRS agents under the IRM was also found to be inconsistent with the purpose of the means test to adopt a uniform, bright-line test that eliminates judicial discretion. This means that other expenses provided for in the National and Local Standards, such as housing expenses, should be used as allowances and not as caps on expenses (at least in the Seventh Circuit).

And, while the court noted that the UST can still request dismissal under section 707(b)(3) for bad faith or based on the totality of the circumstances, the burden of proof will be on the party seeking dismissal.

For those less interested in consumer bankruptcy, the court also addressed finality and appellate jurisdiction issues.