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Supreme Court to Decide Meaning of Key Means Test Provision

By Jonathan Ginsberg, Atlanta Bankruptcy Attorney

A little over a year ago, Bankruptcy Law Network contributor Cathy Moran wrote a post on this blog about the 9th Circuit’s decision in the MBNA v. Ransom case.  At issue was the question of whether an above-median debtor could claim the “ownership deduction” in a means test calculation even if that debtor owned his vehicles free and clear and was not making payments on a vehicle.

The 9th Circuit Court of Appeals concluded that such a debtor could not claim the ownership deduction.  By contrast, other Circuit Courts of Appeal such as the 8th Circuit had decided exactly the opposite.

Because of this difference of opinion among federal appeals courts, the Supreme Court agreed to consider the Ransom case.  On Monday, October 4, 2010, the Court will hear arguments to decide this issue.  A decision is likely sometime after the first of the year.

The means test allows every debtor to claim an “operation expense” for his vehicle or vehicles.  Why, then, should the Supreme Court accept the debtor’s argument – which is also supported by most debtor’s lawyers – and permit an ownership expense when the debtor is not currently making payments?   It turns out that there are many compelling arguments.

First, the plain reading of the statute supports such an interpretation.  Section 707(b)(2) provides that “debtor?s monthly expenses shall be the debtor?s applicable monthly expense amounts specified under the National
Standards and Local Standards, and the debtor?s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides . . .”

Look carefully at the wording of the statute.  Where the National and Local Standards supply monthly expense amounts, those amounts “shall” be used.  By contrast, “actual” expenses are to be applied for other categories.  If the Court accepts the creditor’s argument, it would be using “actual” expenses where the statute requires the use of National and Local Standard figures only.

Secondly, there is the “common sense” argument.  As Cathy pointed out last September, the creditor friendly 9th Circuit opinion punishes debtors who have chosen to drive older, paid off cars and thus encourages debtors to incur unnecessary debt on their vehicles to get the ownership deduction.

Further, the operations expense relates to gasoline, insurance and minor maintenance.  Ownership can refer to major repairs as well as vehicle replacement costs, which are likely during the 5 year term of a possible Chapter 13.

Interestingly, the Solicitor General of the United States has filed a “friend of the Court” brief in support of the creditor’s position.

If you would like to read the full 9th Circuit decision, the briefs filed by the parties and the friend of the court brief filed by both sides, you can do so by clicking on the link.

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Full post as published by Bankruptcy Law Network on October 03, 2010 (boomark / email).