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In Calculating Plan Payments, Can Debtors Deduct For A Car Payment They Don't Have?

Emily Abbott, Associate Attorney

In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Congress requires that the Collection Financial Standards, established by the Internal Revenue Service, be used for certain calculations for debtors in bankruptcy.

Collection Financial Standards
The Standards are a set of established expense limits used by the IRS to help determine a taxpayer's ability to pay delinquent tax liabilities. These Standards are predetermined dollar amounts for monthly expenses for basic necessities such as a food, clothing, housing, and a vehicle. The amounts for certain items vary depending on the region in which a taxpayer lives.

Use of Standards in Bankruptcy
In bankruptcy, these Standards for expenses are to be used in two distinct calculations: (1) in determining which debtors will be permitted to proceed with Chapter 7 bankruptcy, i.e., the means test, and (2) in determining what is reasonable for certain Chapter 13 debtors to spend and, thus, how much those debtors will have available to repay creditors. This is of critical importance to unsecured creditors because, of course, it is more likely they will be paid in a Chapter 13, and also because once in Chapter 13, the less a debtors' expenses, the more disposable income will be available for repayment of unsecured creditors.

Standard for Vehicle Ownership
The Bankruptcy Code ("Code") is clear that use of the Standards is intended because it specifically refers to them in BAPCPA-revised section 707; however, just how and when to use the Standards has been the subject of much litigation in bankruptcy courts across the country. By far, the most hotly debated issue is the application of the Standard for vehicle ownership. The Standard for vehicle ownership is currently listed on an IRS chart as $489 per car, regardless of where the taxpayer lives or whether she leases or finances.

The specific question that has arisen for debtors in bankruptcy is this: can a debtor who has no car payment deduct the Standard amount for vehicle ownership anyway? In other words, is this amount a fixed allowance for all debtors or is it applicable only when a debtor actually has a car payment? Debtors, in order to avoid Chapter 13, or to reduce their repayment obligation once in a Chapter 13, argue that Congress intended for application of the Standard as a fixed amount regardless of their circumstances. They argue this based on language of the Code that says their expenses "shall be" the "applicable monthly expense amounts specified under" the Standards. The word "applicable", the debtors argue, requires them to apply the Standard according to how many cars they own. Creditors and Chapter 13 Trustees will argue that the word applicable means a debtor must have a car payment in order for that Standard to be applicable to her. Additionally, objectors will argue that it is helpful to look at how the IRS uses its own Standards because the IRS' method maximizes repayment.

How the IRS Applies Its Vehicle Ownership Standards
In order to actually use the Standards, one has to go outside the Code because the numbers are set forth in charts in IRS materials, all of which can be found on the internet. The IRS has set its Standards up such that there are two separate monthly amounts applicable to transportation expenses: one for ownership (cost of acquisition, whether a lease or purchase) and the other for operation (gas, maintenance, insurance, registration). The IRS practice, as set forth in its written guidance materials, is to allow taxpayers who actually incur a car payment (lease or financing) to deduct a maximum of $489 in determining how much they can afford to pay per month to repay a tax obligation. This limit applies nationwide.

A single taxpayer is normally allowed one car so if that taxpayer happens to have two cars, she does not get to deduct two amounts, just the actual or Standard, whichever is less, for the one car. Married taxpayers with two car payments will, under IRS practice, be permitted use of the Standard twice, subject to the "actual or Standard, whichever is less" rule for each car. The IRS limits married taxpayers to two vehicles. For operating costs, taxpayers with a vehicle get a fixed amount depending on the region where they live. (If taxpayers do not have a car at all, they get another figure for public transportation regardless of what they spend.)

Case Law
The bankruptcy courts faced with this issue so far are split, with decisions favoring use of the Standard regardless of whether a debtor has a payment slightly outnumbering decisions ruling against a debtor's use of the Standard where there is no payment. These courts generally reason that the word "applicable" does not have the meaning creditors and Trustees assign to it and further, that Congress did not specifically adopt IRS' guidance materials in the language of the Code and thus, the IRS' method is irrelevant in the bankruptcy context.

The good news for creditors is that the seven appellate courts publishing opinions on this issue as of this date have ruled against a debtor's use of the Standard where the debtor has no car payment.

Ninth Circuit BAP: In re Ransom
Becket & Lee LLP litigated this issue in In re Ransom, 380 B.R. 799 (9th Cir. B.A.P. 2007). In Ransom, an above-median Chapter 13 debtor sought to deduct $471 (the Standard for car ownership at the time) even though he paid off his car previous to his bankruptcy filing. The BAP found the plain language of the Code, specifically the word "applicable", meant the debtor had to actually have a car payment in order to take the expense.

Further, the BAP looked at the requirement to use the Standards in the context of the Code and the purpose behind BAPCPA and found, quite logically, what is important is the payments that debtors actually make, not how many cars they own, because the payments that debtors make are what actually affect their ability to make payment to their creditors.

Although the BAP cited with approval lower courts that had specifically followed the IRS guidelines, the decision was not specifically based on this. Mr. Ransom has appealed the decision of the 9th Circuit BAP to the Court of Appeals for the Ninth Circuit and Becket & Lee LLP will continue to defend its victory.

8th Cir BAP: In re Wilson One of the most recent appellate rulings on this issue is notable. Another Bankruptcy Appellate Panel in In re Wilson, Case No. 07-6050, 2007 Bankr. LEXIS 567 (8th Cir B.A.P. March 14, 2008), reversed the ruling of the Bankruptcy Court for the Western District of Arkansas that a debtor who owns a car outright can take the Standard expense.

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