"Money for nothing and your (expenses) for free" - federal circuit split on vehicle ownership expense in BAPCPA means testing.

• Author: Neumann, Andrew J.
• Position: Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

In re Washburn (1)

1. INTRODUCTION

   In 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (2) (BAPCPA or "the Act") in an effort to curb what it believed were excessive and abusive bankruptcy filings. (3) Congress's goals for the new legislation included creating more effective administration of the system and also "ensur[ing] that debtors repay creditors the maximum they can afford." (4) It is unsurprising that a main focus of the Act was to maximize repayment to creditors, given the millions of dollars that banks, credit card companies, and other financial institutions donated to members of Congress, and to the Republican and Democratic parties, between 2000 and 2004. (5)

   Among the criticisms leveled against the Act, arguably the greatest have involved the poor quality of the Act's draftsmanship. (6) One commentator stated that the Act "is rife with bad draftsmanship, dumbfounding contradictions, and curious, even comical, special interest exceptions," (7) while another unaffectionately termed the new Act "BARF (BAnkruptcy ReForm Act)" because of its complexity, confusing language, and "dubious policy choices." (8) The poor quality of the Act's language and construction may be due, at least in part, to the role that lawyers and lobbyists employed by various banks and credit card companies played in drafting it. (9) However, Congress clearly did not thoroughly vet the Act for inconsistencies and errors before its passage, especially considering "congressional testimony to the effect that the act 'was so perfect that not a word need be changed.'" (10)

   This Note addresses an issue arising out of the poor draftsmanship that characterizes BAPCPA. In In re Washburn, the United States Court of Appeals for the Eighth Circuit considered an issue that already has spawned a split between the federal circuits--whether in applying the "means test" a debtor may claim a vehicle ownership expense based upon a vehicle that the debtor owns free and clear. (11) The Eighth Circuit's decision allowing debtors to claim the expense follows decisions by the United States Court of Appeals for the Fifth and Seventh Circuits (12) and puts the court in conflict with the United States Court of Appeals for the Ninth Circuit. (13)

2. FACTS AND HOLDING

   On March 15, 2006, Robert Earl Washburn filed for bankruptcy under Chapter 13 of the Bankruptcy Code. (14) As an individual with above-median income, (15) Washburn's Chapter 13 reorganization plan required that he pay his projected disposable income to his unsecured creditors for an applicable commitment period (16) of sixty months. (17) In determining his projected disposable income, Washburn excluded $471 per month as a vehicle ownership expense for a vehicle he owned outright and unencumbered by any debt. (18) The United States Bankruptcy Court for the Eastern District of Arkansas approved Washburn's reorganization plan, including the $471 monthly vehicle ownership expense. (19)

   One of Washburn's creditors, eCAST Settlement Corporation (eCAST), and the bankruptcy trustee, Joyce Bradley Babin (the Trustee), challenged the bankruptcy court's approval of Washburn's exclusion of the $471 as a vehicle ownership expense because the vehicle was unencumbered. (20) eCAST's motion for direct appeal was granted by the Eighth Circuit, (21) and on appeal the Trustee demonstrated that excluding the $471 from Washburn's projected disposable income would prevent Washburn from fully paying off his unsecured creditors during the sixty-month commitment period. (22) The Trustee provided further calculations, which showed that including the $471 in income would result in Washburn paying off his unsecured creditors in full. (23)

   In deciding the case, the Eighth Circuit declined to follow the Ninth Circuit's recent decision on the same issue, in which the Ninth Circuit rejected such a deduction. (24) Instead, the Eighth Circuit joined the Fifth (25) and Seventh (26) Circuits, holding that a debtor with above-median income may claim a vehicle ownership expense based on a vehicle that the debtor owns outright and unencumbered. (27)

3. LEGAL BACKGROUND

   The portion of the United States Code devoted to bankruptcy is divided into nine chapters. (28) Chapters 1, 3, and 5 include general provisions, guidelines for case administration, and rules for creditors, debtors, and the bankruptcy estate. (29) The rules in these chapters are typically applied to all other chapters, unless otherwise stated. (30) Chapters 7 through 13 are the "operative chapters" and provide the differing types of bankruptcy relief. (31) The two chapters with which this Note is concerned are the two under which consumer filings are generally made, Chapters 7 and 13.

   Chapter 7 involves liquidation of the debtor's assets followed by discharge or cancellation of his remaining eligible debts, allowing the debtor "to make a fresh start." (32) Chapter 13 allows a debtor with a regular income to keep the majority of his assets but requires the debtor to make monthly payments to creditors for up to five years according to the terms of a court-approved plan. (33) At the plan's conclusion, any remaining eligible debts are discharged. (34)

   For both Chapter 7 and Chapter 13, the property to be included within the bankruptcy estate is based upon 11 U.S.C. [section] 541(a), with limited exclusions provided by [section] 541(b) and [section] 541(c)(1). (35) Limited federal exemptions for real property, a motor vehicle, and other property interests are located in [section] 522(d). (36) In a Chapter 7 filing, the property in the estate, less any exclusions and exemptions, is distributed to the debtor's creditors. (37) By contrast, upon confirmation of a Chapter 13 plan, the property of the estate vests in the debtor "free and clear of any claim or interest of any creditor provided for by the plan." (38) Since, in reality, most Chapter 7 filings involve essentially no, or very few, assets, (39) it is important to contrast the relatively quick and painless discharge from bankruptcy under Chapter 7 with the protracted monthly payments required by a Chapter 13 filing. This distinction is especially important because one of the most prominent inclusions in BAPCPA is the "means test," (40) which, under certain circumstances, forces debtors out of Chapter 7 and either into Chapter 13 or out of bankruptcy completely. (41)

   1. The "Means Test"

      Under Chapter 13, to determine a debtor's projected disposable income, which is the amount a debtor will repay to his creditors, a court must identify and deduct from the debtor's disposable income "amounts reasonably necessary to be expended." (42) The process for determining these allowable expenses actually is not found in Chapter 13 (43) but rather in Chapter 7, where the test otherwise is used to identify presumptively abusive filings. (44) This "means test" in [section] 707(b)(2) states that

      [t]he 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.... Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts. (45) The applicable monthly expense amounts are determined based on the Internal Revenue Service's (IRS) National Standards and Local Standards, collectively known as the Collection Financial Standards. (46) These Collection Financial Standards are located in the IRS's Financial Analysis Handbook, which is itself a part of the IRS's Internal Revenue Manual (IRM). (47) The IRS uses the Collection Financial Standards "to help determine a taxpayer's ability to pay a delinquent tax liability." (48)

      In the context of a delinquent tax liability, the Collection Financial Standards represent amounts that are deemed "necessary to provide for a taxpayer's (and his or her family's) health and welfare and/or production of income." (49) The National Standards include expenses for food, clothing, and other items and are the same regardless of where a debtor lives. (50) The Local Standards provide expenses for housing, transportation, and utilities but vary among regions depending on the region's cost of living. (51) Under both the National Standards and the Local Standards, expenses are based on predetermined amounts that are claimed by eligible debtors. (52) Many of a debtor's actual monthly expenses for other goods and services not covered by the National Standards and Local Standards are accounted for as Other Necessary Expenses. (53) The Other Necessary Expenses limit a debtor's deductions to actual expenses for, among others, health insurance, childcare, and accounting and legal fees. (54) While bankruptcy courts use the Collection Financial Standards in substantially the same way as the IRS--budgeting a debtor's (taxpayer's) disposable income to determine the party's ability to pay--bankruptcy courts are not explicitly required to implement these standards in accordance with IRS procedures. (55)

      The vehicle ownership expense allowance, with which the court was concerned in In re Washburn, is one of the applicable monthly expense amounts and is located in the IRS's Local Standards. (56) The vehicle ownership expense is based on the number of cars a debtor owns and is applied uniformly across the country regardless of the region in which the debtor lives. (57) Specifically, the issue that courts have struggled to resolve is whether an "applicable monthly expense amount" is an expense that a debtor must actually incur, or whether it merely refers to "the IRS-designated expense amounts listed as Local Standards applicable in a given geographic region for a debtor's number of vehicles." (58)

   2. Seventh and Fifth Circuits' Approach (59)

      The issue of whether a debtor...