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Can You Deduct an Expense for a Car You Own?

posted by Bob Lawless

The news came today that the Supreme Court has granted cert in Ransom v. MBNA Bank. The issue is whether the Bankruptcy Code means what it says. OK, I'm giving away what I think is the right answer.

The question is whether an above-median income chapter 13 debtor, in calculating "projected disposable income," can deduct an ownership expense for a car even if the debtor owns the car free and clear such that the debtor is not making an debt or lease payments on the car. The Fifth and Seventh Circuits said the plain meaning of the statute clearly allowed the debtor to do so. The Ninth Circuit said the statutory language directed a different result. If you're wondering how so many federal judges can differ over the "plain meaning" of a statute, you're obviously not a lawyer.

We were talking about this issue on Credit Slips back in 2006 (and also here). Section 707(b)(2)(A)(ii)(I) of the Bankruptcy Code states, "The debtor's monthly expenses shall be the debtor's applicable monthly expenses amounts under the "National Standards and Local Standards" (referring to IRS Guidelines). And, the IRS Guidelines give an ownership deduction. And, "shall" means "shall." As I wrote on a related issue:

The problem stems from how Congress used the IRS Guidelines. The IRS, which I understand is less-than-thrilled that these Guidelines are now enshrined in the Bankruptcy Code, established the Guidelines as informal agency operating procedures to determine when to compromise a tax debt based on inability to pay. The IRS Guidelines were intended as a ceiling, used to determine when a taxpayer could afford to cut back on expenses and repay a tax debt. They also were intended as guidelines, not hard-and-fast rules. Congress, however, has used the IRS Guidelines as a hard-and-fast floor for the Bankruptcy Code. The Guidelines establish minimum amounts of expenses to which debtors are entitled to deduct in determining their eligibility for chapter 7, and the Bankruptcy Code then allows debtors to deduct some expenses above those minimums. The Guidelines do not work well when applied to situations where debtors have hypothetical as opposed to actual expenses, but those are the rules that Congress chose.

The statute seems pretty clear. Courts like the Ninth Circuit, however, fall into a trap of thinking about the phantom ownership deduction as some sort of unwarranted benefit for bankruptcy debtors. In fact, by not allowing an ownership deduction even when the debtor owns a car free and clear, the court creates incentives for further borrowing and possibly even irresponsible behavior. In a world where a new car loan decrease chapter 13 payment obligations but keeping the old clunker does not, debtors will have even more reason to buy a new car before filing bankruptcy.

And, yes, it's a goofy system, but it's the system we got out of the 2005 bankruptcy law. The law used to provide--and still does for debtors earning below their state's median income--that the bankruptcy judge should determine amounts "reasonably necessary" to be expended for the support of the debtor or the debtor's dependents. Under the old system, the judge uses his or her judgment and discretion to apply individualized justice in each chapter 13 case. Congress tried to remove that judgment and discretion, with the predictable result that we will have a lot of cases that fit like square pegs in the round hole of the statutory language. The Supreme Court now has to decide whether to square off that hole or stick with the language that Congress used.


The problems are: 1) the operating expense deduction for vehicles is probably too low; 2) the ownership expense, for those who own vehicles free and clear, is far too high - it is a windfall that means debtor's actual ability to pay is ignored, contrary to the stated intent of BAPCPA; 3) there is a problem with how many cars a debtor can deduct - a single debtor has a 1995 Mercury and a 2002 Honda - does the debtor get to deduct an ownership expense for two cars? ($489 x 2 ='s $978 in non-existent ownership expenses). Of course, if two cars are allowed, why not spend a couple hundred bucks on a beater to save $489 a month in disposable income in a Chapter 13, or to rebut the presumption and qualify for a Chapter 7? If you can't deduct both your cars - where is this "plain language" that say you can't? 4) If a single debtor can deduct two cars, why can't joint debtors? Or should they be forced to each file separately, each buying their own junk car?; 5) what is the role of the IRS Manual? Some courts say it is part of the law, others say it isn't; 6) the ownership deduction is NOT a ceiling on ownership expenses - if you have an $900 a month payment on a Lexus, the amount over the standard ownership amount is a deduction - again, a perverse incentive for debtors to go out and buy a luxury vehicle or two before filing bankruptcy.

The problem isn't that "you're obviously not a lawyer" - the problem is a statute that was drawn up by Visa employees who thought "legislative drafting" was a cool NASCAR manuever. And Congress voted for it - without listening to those who had actually read the BAPCPA and saw the shadowy outlines of how it would not work.

The issue needs to be decided, so it's great that the Supremes are taking it on. Equally pressing, though, is the question of whether the results of the means test is controlling in determining a Chapter 13 debtor's payment. Also up on Cert., I believe, is the question of whether the B22C result controls, even where the debtor's future projected disposable income differs markedly from the B22C number because of EITHER a decrease or increase in income from the 6-month average. While the means test was supposed to give us mathematically exact results, the ability to argue the content of Schedules I and J gives Chapter 13 Trustees, in my experience, LOTS of leeway to get around the mathematical result when it suits them, while using the mathematical result as an impenetrable floor when Schedules I and J show a change for the worse.

I see the 13 Trustees floating between the means test and I and J all the time. Is it Mechanical? Is it forward looking? In the 5th apparently its forward looking as well as in other cir. "This is what the "Mean" test says they can afford". Has no effect on a 13 trustee. So why the hell do we have it in 13? They should just say, "if your in a 13 then the "mean" test does not apply". Not letting them switch back and forth whenever they want.

This hit the nail on the head and is exactly what the UST warned us not to do! We are able to claim the ownership expense in the 5th Cir. but if we do the debtor/s would be subject to audit for abuse under 707(b)3(something we would rather have because its harder to prove)But it is a pain in the ass and cuts at your time and overhead. WHICH WAS THE WHOLE POINT OF BANKRUPTCY ABUSE AND "CREDITOR" PROTECTION ACT! TO KEEP PEOPLE FROM FILING AND KEEP ATTORNEYS FROM DOING BANKRUPTCIES ALL TOGETHER.

Another provision that strikes me as odd is the amount the "mean" test allows for apartment/home lease. Something crazy like $900 per month max..???.. No matter how circular a situation seems sometimes and actually most of the time it just wont fit into that hole! I don't see a family of 4-6 with high school age children leasing a home for $900 per month even down here. It's for the support of a dependent in theory right? Got to have a roof but the UST via IRS Guidelines seems to think that high school age kids can all sleep in the same bed. Not to mention the fact that most apartments require you to lease an apartment with as many rooms as you have kids or up to their max.

Didn't Sotomayor mention that the Means Test itself provided the incentive for abuse? Isn't it odd that the very thing it did not want to do it did. I guess not for that administration. Smaller Government.....Lets increase the UST duties and expenses by 300%.

Rant over...

The deduction is for "operating costs," not just for a debt payment on a secured debt. The car still needs gas, oil, tires, insurance, etc. Those things cost money, and I don't think the figures excessive when viewed in that light.

It is cases like this that make me feel a little sorry for judges, particularly the appellate variety. What we have here, again, is a ridiculous amount of brain power pounding away at an issue created entirely by the legistature's abysmal failure to think or write clearly about an issue. It is all the worse when as here it is an issue that even this consumer bankruptcy lawyer would have to classify the issue as minor, in terms of what the Supreme Court ought to be doing.

"The deduction is for "operating costs," not just for a debt payment on a secured debt. The car still needs gas, oil, tires, insurance, etc. Those things cost money, and I don't think the figures excessive when viewed in that light."

No, there are two separate expense deductions. One is for operating expenses of the vehicles - Line 27B on the Form 22C. You check the boxes for 0 to 2 or more vehicles.

There is a second deduction for the ownership costs of the vehicle on Lines 28 and 29 of the 22C. On those lines, there is a "deduction from the deduction" for the amount of the secured debt payment.

The secured debt payment - including any amount (amortized over 60 months) that is paid in excess of the IRS standard ownership deduction, is deducted on Line 48.

Where the car payment is less than the standard IRS ownership deduction, it nets out to the amount of the IRS deduction. If the amortized car payments are more than the IRS deduction, the debtors get the higher actual cost of the amortized monthly vehicle loan payment.

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