Bankruptcy

Supreme Court Hands Credit Card Companies a Big Win

By Jonathan

Yesterday, the U.S. Supreme Court issued a creditor friendly decision in the case of Ransom v. Fia Card Services.  At issues was the "ownership expense" deduction in the means test.

The means test is a calculation used to determine whether a debtor has enough "disposable income" to afford a Chapter 13 repayment plan.

In the Ransom case, the debtor (Jason Ransom) claimed a means test deduction for both operation of a vehicle ($338 per month) and for ownership ($471 per month).  The problem – Mr. Ransom owned his vehicle free and clear.

In an 8-1 decision written by Obama appointee Elena Kagan (the lone dissent issued by conservative Justice Scalia), the Supreme Court held that a debtor who owns his vehicle free and clear can only claim a deduction for vehicle operation but not a deduction for ownership.

In Mr. Ransom's case, this means that for bankruptcy calculation purposes, he has an extra $471 sitting around that he can use to pay credit card companies in a Chapter 13.

At first blush, the Supreme Court's decision would seem to make sense – why should a debtor get to claim an ownership deduction if he does not have a car payment?

Here is the issue:  Chapter 13 cases last 5 years.  Assuming that Mr. Ransom has a paid off car, it is likely that his car is not new.  What happens when Mr. Ransom needs to replace his car?  He will have no funds to do so because any funds that he might have left over are being used to fund his Chapter 13.

Further, the means test budget is derived from IRS numbers that are used in tax settlement cases.  These means test budgets are a little better than a "rice and beans" budget but there is very little else.  Is it reasonable to expect that a debtor will have no emergencies during the next five years – a funeral to attend?  a roof to fix?  a major car repair?

The Supreme Court's decision ignores the realities of life.  In the immediate near term the debtor may have $471 to pay towards his Chapter 13, but is it reasonable to expect that this "disposable" money will be there month after month?  The Chapter 13 trustee will expect it, and these funds will come out in a payroll deduction.  But I fear that even more Chapter 13 cases will fail when debtors lose their jobs because they do not have transportation or checks for mortgages will bounce because the funds were used for plumbing repairs or other emergencies.

The Ransom decision also sends a very strange message to debtors entering the bankruptcy process.  Instead of encouraging people to avoid debt, the Ransom decision encourages filers to incur more debt prior to filing.   In this upside down logic, a debtor would benefit from taking out a car title loan prior to bankruptcy since having debt owned on a car will allow that debtor to claim an ownership expense.

Creditors like credit card companies are concerned about getting as much as they can as quickly as they can, and such an position makes sense in a business context.  But who loses when court supervised repayment plans (Chapter 13) are doomed to fail because there are no accommodations for emergencies or other likely needs during a looming 5 year time span.

Full post as published by The BK Blawg on January 12, 2011 (boomark / email).