Home -> Law Blog Directory -> Bankruptcy Blogs -> Bankruptcy Law Network

Bankruptcy

: Bankruptcy Law Network

Should the Supreme Court Teach a Bankruptcy Seminar? Yes, as soon as possible.

By Andy Miofsky, Illinois Bankruptcy Attorney

Five years after bankruptcy reform, and millions of cases later,  the Supreme Court is still deciding issues affecting the most basic administration of bankruptcy cases.  The latest case, In re Ransom, held a debtor may not deduct an ownership expense on the Statement of Current Monthly Income [B22C] for a vehicle that was not encumbered by a lien.

The court did not specify whether the Ransom decision, a chapter 13 case, applies to chapter 7 cases, yet the Court compared Ransom with two contrary chapter 7 Court of Appeal decisions, In re Ross-Tousey, and In re Tate, both of  which permitted that ownership deduction for a free and clear vehicle on the chapter 7 Means Test.  Did Ransom overrule Ross Tousey, Tate, and various District Court decisions?   Still today bankruptcy attorneys do not know how to answer that question.  At least one esteemed bankruptcy professor fashioned an argument that Ross-Tousey remains good law because means testing in Ransom looked to see how much money a chapter 13 debtor reasonably needed for support during the duration of the chapter 13 case.  Time and another case decision will only tell.

Well over a million bankruptcy cases are filed annually.  Prior to the Ransom decision, most debtors with one or two cars claimed an ownership deduction for each fully owned non-liened vehicle.  Ransom changed the landscape five years after the ?new? bankruptcy law took effect.  But other questions remain unanswered.

In Ransom, the Supreme Court adopted a definition of ?ownership expense? as being limited to loan or lease payments.  On the issue whether a debtor may deduct the full ownership expense amount listed in the IRS Local Standards [used in bankruptcy calculations] if debtor does not actually spend that much, the Supreme Court directly, pointedly and matter of factually said ?We decline to resolve this issue?.

Equally disturbing is language in the Ransom decision that says a debtor may not claim actual expenses that exceed the amount of the allowance listed in the IRS tables.  In practice, a debtor with a car loan or lease payment higher than the allowance currently takes the higher expense as a secured payment deduction.  Does Ransom threaten payment of secured debt to car lenders?

2010 has been a busy bankruptcy year for the Supreme Court.  Just a few months back, in June 2010, that court issued a watershed decision, Hamilton vs Lanning, that changed the way debtors calculate projected disposable income available to pay unsecured creditors.  Bankruptcy reform legislation took effect on October 17, 2005.  Since then, courts have struggled to calculate ?current monthly income?,  which oddly enough averaged income over a six month period before bankruptcy, but resulted in a number that was not actually current, not fully monthly and not accurately income.  Bankruptcy Law Network contributor Dan Press analyzed the Lanning decision this way:  ?rather than mechanically applying the calculation of current monthly income which looks at debtor?s income for the 6 calendar months before the filing of the petition, the court can take into consideration changes in income that have occurred or are known or are virtually certain to occur at the time of confirmation.?

Prior to Lanning, some courts decided to mechanically count income only during the 6 months, some courts only looked to actual income earned most recent to the time of filing bankruptcy, some courts looked to a combination of both the mechanical average 6 month look-back period with adjustment for recent increases or recent decreases, and some courts experienced contrary opinions by different judges within the same district.  Nearly 4 years 8 months after the first reform case was filed, the Supreme Court told us how to calculate debtor?s income.  A chapter 13 bankruptcy plan may not last longer than 60 months.  Ironically, a case filed on or after October 17, 2005 and slated for the maximum 5 years could have been active at the time Lanning decided five years later how to calculate monthly plan payments for that case.

The highest court in the land is increasingly called upon to determine issues and answer questions of bankruptcy law.  In March 2010, the Supreme Court clarified that a lawyer could legally advise a client regarding appropriate situations where borrowing money prior to filing bankruptcy was in the client?s best interest and where the client intended to repay the money after filing bankruptcy.  See In re Milavetz.

Are other issues pending?  Are major issues unresolved?  Certainly.  A few months before Christmas 2010, bankruptcy courts rendered opposite decisions in the Southern Illinois case of In re King, and in the Northern Illinois case of In re Davis, regarding whether modification of a confirmed chapter 13 plan required compliance via 1329 with the 1325b requirement that debtor pay unsecured creditors all projected disposable income during the applicable commitment period.

Litigation is expensive, time-consuming and delays justice for debtors and creditors alike.  Equally if not more importantly, unresolved issues frustrate judges and lawyers who are forced to speak about bankruptcy law in gray terms and with disclaimers of uncertainty.  Bankruptcy reform legislation has not been applied equally, certainly or consistently during its initial five years.  Though the Supreme Court is not in the business of issuing advisory opinions, more questions need answers, sooner than later.

Liked This Article? Why Not Share It?emailLinkedInDiggStumbleUponFacebookGoogle BuzzTwitter

Full post as published by Bankruptcy Law Network on January 21, 2011 (boomark / email).