« Get a Signed Glossy Photo from Adam Levitin | Main | Housing Agenda for the new Consumer Czar »

The U.S. Trustee's Office Already Has Decided Ransom

posted by Bob Lawless

During this past week in Bankruptcy with Bob, otherwise known as my bankruptcy course, we covered the means test. As my students now know, the means test is the screen that the U.S. Congress put on chapter 7 back in 2005. If you're below the state median income for a household of your size, you can file chapter 7. If you're above median income, the means test starts with your gross income and takes a series of deductions based on IRS guidelines to determine your disposable income. If your disposable income meets certain thresholds, meaning you can afford to pay back unsecured creditors some part of what you owe, you must file chapter 13. There are exceptions and more details, but that description works as a general matter. The Executive Office of U.S. Trustee (EOUST) helps keep track of the numbers to plug into the test, but in one particular way, it has taken a legal position on a contested issue without making clear its position is contested.

When deducting expenses, one of the issues is whether a debtor can deduct an "ownership expense" for the a car the debtor already owns. For a debtor right at the edge of eligibility, this expense can mean the difference between qualifying for chapter 7 or not. The automobile ownership expense is supposed to represent the cost of lease or car payments; car maintenance, insurance, and so forth is accounted for separately. Thus, if a debtor already owns a car, our first instinct might be to deny an "ownership expense" because the debtor has no actual, out-of-pocket expenses. But, we also can think of the "ownership expense" as the cost of saving up to replace an existing car. In addition, if we deny an ownership expense to a debtor who owns a car free and clear, we create an incentive to buy a new car on credit just before filing bankruptcy so that there is an actual out-of-pocket "ownership expense" the debtor can deduct.

In any event, I think the Bankruptcy Code directs the bankruptcy courts to allow an ownership expense even if the debtor owns an automobile free and clear. I explained my reasoning in a past blog post. Others disagree with my reading of the Bankruptcy Code, notably the U.S. Court of Appeals for the Ninth Circuit. Then again, the U.S. Courts of Appeals for the Fifth and Seventh Circuits agree with me. The U.S. Supreme Court has taken the issue on cert in a case called Ransom v. MBNA Bank.

On its means testing web site, the EOUST already has decided the issue for the Supreme Court:

If a taxpayer has a car, but no car payment, only the operating costs portion of the transportation standard is used to figure the allowable transportation expense.

That's right only if the statement begins with the qualification, "the EOST has takent the legal position that . . . ."

Some might say that the qualification is implicit, at least for lawyers. But that won't be true for the one in nine bankruptcy filers who file without a lawyer. And, I'm not sure it's true for lawyers who are not bankruptcy specialists or even for bankruptcy specialists who are too busy keeping up with dozens or hundreds of cases to parse the language on the EOUST's web site.

What is most troubling to me is that this is another, admittedly small, example of how the EOUST tends to put its thumb on the scale on behalf of creditor interests. Many Credit Slips posts have discussed the EOUST's positions (here and here and here and here and here). The EOUST defines its own mission as "The USTP's mission is to promote integrity and efficiency in the nation’s bankruptcy system by enforcing bankruptcy laws, providing oversight of private trustees, and maintaining operational excellence." By collecting the means testing information and publishing it in one place, the EOUST has done a great service, but it should make clear when it has taken a contestable position as a matter of legal interpretation.

Hat tip to David Park for bringing the language on the EOUST web site to my attention.


I agree with you, Prof Lawless. As I read the law, if you have an ownership expense of any kind, you get the deduction; the category is not limited to purchase expenses. Things like vehicle registration and emission inspection and so forth are all ownership expenses, although they are not purchase expenses. A financing lease will pass those from the owner to the lessee but that does not change the fact that, for a non-leased vehicle, they are ownership expenses.

One of the many screwed up aspects of the Means Test.

If you own a 2000 Ford F-150, free and clear of liens, deducting $496 as an ownership is free money in your budget. If couple owns two vehicles free and clear, it is a windfall. If an individual can deduct for two free and clear vehicles - the Means Test is a flat out joke.

On the other hand, if it is not allowed, the operating expenses allowed by the Means Test are unrealistically low.

Lanning's approach of looking at actual expenses may bode well for the EOUST's position - but their website statements should reflect that they are setting forth their position, and not something that is found on the 22A (or 22C) Official Form, or is settled in the case law. (Like anything in bankruptcy that has not been decided by the Supreme Court is "settled law".)

While the argument is that debtors should be given an incentive to buy a car on credit, they also should be given an incentive to buy a junker car for cash to knock off $496 from their budget.

Whether an objective set of budget criteria can ever function well in a bankruptcy setting is an interesting question. If enough thought and experience went into the criteria, with some built in flexibility - maybe.

Whether the Means Test can function fairly and effectively is not really subject to debate - the answer is clearly: "No". When Yacht payments, Lexus payments, and vacation home payments are deductible budget items to be paid for by unsecured creditors - it can't be anything but a bad joke.

The worst aspects for the debtors - where reduced income did result in reduced CMI - has been fixed for Chapter 13 debtors, to a great degree, by Lanning. It is still a huge problem for those trying to file a Chapter 7 after a job loss.

The old standards: I and J and "reasonably necessary", were simpler and fairer to all concerned.

"should be given an incentive to buy a car"

should read: "should not be given an incentive to buy a car"

AMC!!!! What he said...! It's funny you said the 5th Cir. agrees with you. The UST even in the SDTX still thinks we can't claim it or...how did they say it...??? Uh.... be subject to another provision of 707...oh ya! Totality of the Circumstances.

"If you own a 2000 Ford F-150, free and clear of liens, deducting $496 as an ownership is free money in your budget."

Using Bob's depreciation analogy, yes, a 2000 model would be past a reasonable 10-year straight-line. But a little perspective, please. It's probably a Ford POS model in 2010. Most people don't get 10 years out of a vehicle. Permitting cash savings to replace isn't at all unreasonable, IMO.

Why does no one ever address that Ransom also affirmed prior case law that lets a debtor deduct an additional $200 in operating expense per car that is over 6 yrs or 75k mi? Also although i think the Court only intended the additional $200 for vehicles owned free and clear, you can make the argument, based on what the case says, that it applies even if the vehicle has a lien and you are claiming the ownership expense. Ive succesfully used it in a number of cases to get debtors to qualify under the MT who otherwise wouldnt. Especially if you have a 2car household you can end up with an additional $400...

One answer is to use Part VI (VII in chapter 13): Additional Expense Claims.

A debtor needs a car to get to work. If the debtor has a few tickets, or god forbid a DUI, the debtor can easily spend over $100 per month on insurance. If the debtor is a diabetic, gluten intolerant, or has dietary requirements, then the food deduction is too low.

The problem is that it's like plowing red clay trying to prove that 1) the expense is necessary; 2) it exceeds the guidelines; 3) it's properly documented; and 4) in the case of a a Debtor with a DUI, that the Means Test is neutral on the reasons why the insurance is $250 per month.

It's also interesting that the instructions in that section read "that you content should be an additional deduction," which is a pretty clear signal to expect to get US Trustee resistance. It's also why I rarely use it; and the two lawyers I've talked to about it have never used it.

Obviously the means test should not be a good way for someone to determine if you can file Chapter 7 bankruptcy or not. But I guess the government wanted to stop gap the ease that people can just file Chapter 7 hence they had put in the means test. I'm sure at some point down the road, this bankruptcy law will be amended to be a little fairer to all.

The Means Test works fine in the Eastern District of Pennsylvania, but only because the UST in this district takes a common sense approach. Essentially, the Means Test tells you "where to look." Suppose the the MT deductions are applied, and the DMI is $400.00 per month. However, the debtor works for Verizon, lives in Northampton County, PA, and travels from PA to New York City every day to run cable under Manhattan streets. His transportation expenses are enormous -- about $1,500 per month. He fails the MT, because Verizon pays him $80,000 per year, his wife makes $23,000 per year, and they have no children. Does he have an extra $400.00 to pay his credit cards? No, because he is spending his money on gas, tolls, a PATH train, and high car maintenance costs. So, I file the 7, the presumption of abuse (POA) arises, I email the UST with the circumstances, the UST asks for verification, which I provide, and the UST issues a declination letter. For a couple making $103,000 per year, I think this is a reasonable requirement -- to show where the money goes. In this example, it's easy to do. If the UST took the position that the DMI is DMI, so just pay in or don't file, then I would agree the MT is ridiculous. However, if the function of the MT is to say to the UST "You need to take a closer look at this one, because the debtor's household makes 6 figures and has no children," then I have no problem with it. I have always felt that if the MT is used to shine a brighter light on certain debtors than others, as opposed to rigidly dictating the Plan payment, or the requirement of a Plan in the first place (i.e., Ch 13 v. Ch 7), then it's not a bad thing.

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.