By: Henry E. Hildebrand III. Henry E. Hildebrand III has served as Standing Chapter 13 Trustee for the Middle
District of Tennessee since 1982. Reprinted with permission from the ABI Journal, Vol. XXX, No. 2, March 2011.
Most consumer bankruptcy practitioners are already aware of the holding of the Supreme Court in Ransom v FIA Card Services, N.A., 2011 WL 66438 (January 11, 2011), and its impact on the way they calculate chapter 13 plans. Justice Kagan, writing for an eight-member majority, held that an above-median income chapter 13 debtor was not entitled to take the ownership allowance for an automobile as specified in the Internal Revenue Service’s Local Standards unless the debtor actually had a car payment. The IRS creates these allowances (the Collection Financial Standards) as a means of analyzing whether it should accept an offer in compromise from a taxpayer. The Standards’ sole function is to assist in the collection of delinquent taxes.
The facts of the case are straightforward. When Mr. Ransom filed his chapter 13 petition, he owned a 2004 Toyota Camry outright, free of any debt; he had no car payment. For purposes of calculating his projected disposable income, Ransom claimed a “car ownership deduction” of $471 for the Camry, the amount specified in the IRS’ ownership cost table of Local Collection Financial Standards.[i] Based upon this calculation, he proposed a five-year plan that would pay approximately 25% of his unsecured debt. An objection by a credit card claimholder asserted that Ransom was not entitled to take the ownership allowance in the standards because Random did not make a loan or lease payment for the car. The Internal Revenue Manual guides the IRS in applying the standards: “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.” [ii] Without this allowance, his disposable income over 60 months of the plan would increase by approximately $28,000.
The decision gives a clear instruction to debtors and trustees: if a debtor does not have a car payment, the debtor cannot deduct the amount of the allowance. A Supreme Court decision, however, is not important so much for the actual holding in Mr. Ransom’s case. It provides the direction to practitioners, including trustees, for cases yet to come. Trustees, authorized to enforce the disposable income test of 11 U.S.C. § 1325(b), will carefully parse through the language of the decision to determine what instruction or direction the Supreme Court is giving to the practitioners for application applying the disposable income test in the future. After careful examination, chapter 13 trustees have every right to be concerned over the lack of clarity in the opinion.
Traditionally, in nearly every recent Supreme Court decision, the Court has recognized a fundamental bankruptcy concept – that a debtor is entitled to a “fresh start.”[iii] Judicial examination of the bankruptcy code has always been through the prism of a debtor’s fresh start. Nowhere in Justice Kagan’s opinion, however, is the concept of a “fresh start” even mentioned. The long held view of bankruptcy – balancing the equitable distribution of property amongst the debtor’s creditors and the discharge that gives a debtor a fresh start – appears to have been abandoned. The view has apparently been replaced with Justice Kagan’s reference to legislative history of BAPCPA: “Congress designed the means test to measure debtors’ disposable income and, in that way, ‘to ensure that [they] repay creditors the maximum they can afford.’” Viewed through this position, it is clear that the Supreme Court is directing bankruptcy constituents to interpret the Code in such a way as to compel debtors to repay their creditors the maximum they can afford.
Starting with this view, it is no surprise that Ransom, who had no payment on a car, should not be allowed to shelter $28,000 of future income from his creditors. This type of “imaginary” expense runs directly counter to the reality that Ransom could afford to pay more back to his creditors.
With this in mind, therefore, a trustee is left with several major questions: If an above-median income chapter 13 debtor has a car note payment of less than the IRS’ allowance, is the expense deduction permitted under 707(b) limited to the debtor’s actual expense, or is the debtor entitled to the full allowance (now about $30,000 over 60 months)? The Supreme Court specifically ducked this issue.[iv] Justice Kagan invites litigation on this issue, noting that a debtor’s out-of-pocket costs “may well not control the amount of the deduction. If a debtor’s actual expenses exceed the amounts listed on the tables, for example, the debtor may claim an allowance only for the specified sum, rather than for his real expenditures.” (Slip Opinion, Page 13) Since the Court has directed us to consult the Internal Revenue Manual, and since the Code should be interpreted to “ensure that [debtors] repay creditors the maximum they can afford,” it is not a stretch to see courts denying a deduction for an ownership allowance that exceeds the amount the debtor is actually paying.
If a trustee is directed to apply the disposable income test, with an eye upon the IRS’ own interpretation of the Collection Financial Standards, many trustees will seek to “cap” the applicable ownership allowance to the amount which the debtor actually must pay. Thus, for a debtor who has 10 months of automobile payments remaining on their car at $250 per month, the maximum allowance would be $2,500, rather than $30,000 as permitted by 60 months of the Local Standard.
To be fair, Justice Kagan mentioned that the Court did not incorporate the IRS guidelines into the statute. In so doing, however, she did direct bankruptcy courts to “consult this material in interpreting the National and Local Standards; after all, the IRS uses those tables for a similar purpose – to determine how much money a delinquent taxpayer can afford to pay the Government.” As Justice Scalia noted in his dissent, it is somewhat incongruous for Justice Kagan’s decision to hold that the statute does not incorporate the IRS’ guidelines but directs courts to consult the Internal Revenue Manual in interpreting the National and Local Standards. As Justice Scalia noted, “in the present context, the real-world difference between finding the guidelines incorporated and finding it appropriate to consult them escapes me, since I can imagine no basis for consulting them unless Congress meant them to be consulted, which would mean they are incorporated.” (Page 4 of J. Scalia, dissent)
Also confusing is Justice Kagan’s reference to a remedy for the situation of a debtor whose automobile payments “cease during the life of the plan…” The hypothetical raised by the Court is one where the debtor files a chapter 13 petition with only one payment remaining on a car. She assumes, apparently, that a car note that ends before the plan completes somehow increases funds from that point on. If a debtor is entitled to a full allowance when the plan is confirmed, and the chapter 13 plan proposes to treat the auto loan pursuant to § 1325(a)(5)(B), what change of financial circumstances exist? If a debtor enters chapter 13 with a Mercedes Benz, paying $600 per month for the vehicle, but there is only one payment remaining on the Mercedes, there is absolutely no change in the debtor’s financial circumstances from confirmation to the end of the plan. The plan that pays this secured claim – $600 – over five years would present no change. Since chapter 13 trustees are expected to be the wielders of the § 1329 modification tool, Justice Kagan and the majority have not clarified when such a modification would be appropriate. It does appear that the Court agrees with the Seventh Circuit decision in the matter of In re Witkowski, 16 F.3d 739 (7th Cir 1994) by holding that to pursue a plan modification, there does not have to be an unforeseen change in the debtor’s circumstances. In the hypothetical cited by Justice Kagan, there is no change presented subsequent to the confirmation of a plan where the original contract would see an end to the automobile installment payments. Again, the only fair way of reading the opinion is that the contractual auto payments, divided by 60, cap the Standards ownership allowance.
The Supreme Court rejected all of the legal and practical arguments of the debtor in the Ransom case. The argument that Congress intended to provide a “sinking fund” with which a debtor could purchase an automobile during the pendency of a case was not accepted.
BAPCPA has often been called legislation designed to remove the discretion of bankruptcy judges in dealing with issues of a debtor’s disposable income and how much chapter 13 debtors must repay to creditors. What Ransom has done, however, is replaced the discretion of the Court with the discretion of the trustee. After all, § 1325(b) is only applicable if there is an objection raised by an unsecured creditor (as was the case in Ransom) or by the Chapter 13 trustee. In the overwhelming majority of cases, § 1325(b) issues are not raised by creditors; they are raised by the trustee. If the trustee has the discretion exercising a view of what is appropriate for a debtor to expend, that trustee may elect to forego objecting to a debtor’s proposed plan or to raise an objection to allowances. It seems we have gone full circle, from discretion of the court, to a fixed allowance, to the discretion of the trustee. Most trustees will welcome that responsibility.
[i] This amount has now increased to $496 per month.
[ii] I.R.M. § 126.96.36.199(1)(B).
[iii] Schwab v. Reilly, 130 S. Ct. 2652, 2667 (2010); Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367, 127 S. Ct. 1105 (2007); Central Virginia Community College v. Katz, 546 U.S. 356, 126 S. Ct. 990, 996 (2006); Rousey v. Jacoway, 544 U.S. 320, 125 S. Ct. 1561 (2005); Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 124 S. Ct. 1905, 1906 (2004); F.C.C v. NextWave Personal Communications, Inc., 537 U.S. 293, 123 S. Ct. 832, 840 (2003); BFP v. Resolution Trust Corp., 511 U.S. 531, 114 S. Ct. 1757, 1774 (1994); Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 777 (1992).
[iv] “FIA, relying on the IRS’ practice, contends … that a debtor may claim only his actual expenditures in this circumstance … we decline to resolve this issue. Because Ransom incurs no ownership expenses at all, the car-ownership allowance is not applicable to him in the first instance.” Footnote 8.
Henry E. Hildebrand, III has served as Standing Trustee for Chapter 13 matters in the Middle District of Tennessee since 1982 and as Standing Chapter 12 Trustee for that district since 1986. He also is of counsel to the Nashville law firm of Lassiter, Tidwell, Davis, Keller & Hogan, PLLC.
Mr. Hildebrand graduated from Vanderbilt University and received his J.D. from the National Law Center of George Washington University. He is a fellow of the American College of Bankruptcy and serves on its Education Committee. He is Board Certified in consumer bankruptcy law by the American Board of Certification. He is Chairman of the Legislative and Legal Affairs Committee for the National Association of Chapter 13 Trustees (NACTT). In addition, he is on the Board of Directors for the NACTT Academy for Consumer Bankruptcy Education, Inc.
Mr. Hildebrand has served as case notes author for The Quarterly, a newsletter dealing with consumer bankruptcy issues and Chapter 13 practice in particular, since 1991. He is a regular contributor to the American Bankruptcy Institute Journal. He is an adjunct faculty member for the Nashville School of Law and St. Johns University School of Law.