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

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.

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

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.

Full post as published by Credit Slips on September 15, 2010 (boomark / email).