James P. Terpening Iii, All or Nothing: Properly Deducting Vehicle Ownership Expenses Under Sec. 707(b)(2)(a)(ii)(i)

• Publication year: 2011

ALL OR NOTHING: PROPERLY DEDUCTING VEHICLE OWNERSHIP EXPENSES UNDER Sec. 707(B)(2)(A)(II)(I)

ABSTRACT

Congress's introduction of means testing under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 placed increased significance on calculating debtors' currently monthly income for purposes of determining whether debtors are abusing bankruptcy. The Bankruptcy Code allows debtors to deduct vehicle ownership expenses from this calculation under Sec. 707(b)(2)(A)(ii)(I). That section's ambiguous language has courts divided over whether to apply this deduction when a debtor has no actual ownership expenses. This division subjects creditors and debtors to significantly different treatment depending upon the forum administrating their bankruptcy proceedings. This Comment explains how courts and parties will find greater uniformity and equity by looking to the policy considerations supporting the vehicle ownership expense deduction and how those considerations require that the deduction should apply only when debtors have actual ownership expenses.

INTRODUCTION

Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) to reform the consumer bankruptcy system.¹As BAPCPA's title demonstrates, Congress perceived the bankruptcy system prior to 2005 as permitting excessive abuse by both debtors and creditors.²Congress thus enacted BAPCPA to ensure that debtors repay their creditors to the maximum extent possible in bankruptcy,³to reduce perceived excessive judicial discretion in bankruptcy proceedings, and to make judicial decisions concerning bankruptcy more uniform and predictable.⁴BAPCPA, however, has not successfully implemented these reforms in cases involving the vehicle ownership expense deduction located in Sec. 707(b)(2)(A)(ii)(I) of the Bankruptcy Code.

BAPCPA implements its reforms with, among other provisions, a procedural mechanism in Sec. 707 called the "means test."⁵The means test measures debtors' ability to repay their creditors in both chapter 7 and chapter

13 bankruptcies and ultimately ensures that those debtors capable of repaying their creditors will be funneled into chapter 13 restructuring, as opposed to chapter 7 liquidation.⁶To determine which type of bankruptcy relief consumer debtors may obtain, the means test measures whether their current monthly income exceeds a specific threshold after subtracting certain permitted expense deductions.⁷If a debtor's current monthly income exceeds this threshold, BAPCPA presumes the debtor's chapter 7 case is abusive, and a court will convert it to a chapter 13 case or dismiss it altogether.⁸Because the total amount of a debtor's permitted expense deductions may bring the debtor's current monthly income above or below the means test threshold, an accurate determination of those deductions often determines the critical question of what type of relief the debtor is entitled to receive in bankruptcy.⁹

As currently written and interpreted by courts, BAPCPA's means test does not resolve whether debtors may deduct vehicle ownership expenses for vehicles they own free and clear of any actual ownership expenses-i.e., debt or lease payments-on the bankruptcy petition date. Properly calculating the vehicle ownership expense deduction has significant consequences in consumer bankruptcy because the deduction is sizeable-$489 for one vehicle or $978 for a maximum of two vehicles¹⁰-and often determines the outcome of the means test and whether debtors obtain chapter 7 relief, whether creditors are paid in full through chapter 13, or whether a debtor's case should be dismissed altogether.¹¹Most debtors claim this deduction to reduce their current monthly income as calculated under the means test and keep more of that income for themselves.¹²Consequently, creditors often object because these deductions reduce their ultimate payout and may allow debtors to abuse bankruptcy and prejudice creditors' interests.¹³

The issues surrounding the vehicle ownership expense deduction shed light on how Congress's aims in enacting BAPCPA-namely, encouraging uniformity in application of bankruptcy law and maximum repayment to creditors-often conflict.¹⁴For instance, allowing a blanket deduction based strictly on the number of vehicles owned by a debtor without regard to the debtor's actual ownership expenses promotes the increased uniformity and predictability in judicial decisions that Congress aimed to achieve. This uniformity and predictability, however, may allow debtors to deduct expenses for vehicles they do not use or are inoperable and thus undermines Congress's aim of ensuring that debtors repay their creditors to the maximum extent possible in bankruptcy.¹⁵

Because vehicle ownership expense deduction cases implicate these conflicting aims and apply in so many consumer bankruptcies, case law on vehicle ownership expense deductions has developed inconsistently and rapidly. As of January 2009, at least eighty bankruptcy courts have addressed this issue and are split in their decisions.¹⁶This split persists among district courts¹⁷and bankruptcy appellate panels.¹⁸Recently, the United States Circuit

Court of Appeals for the Seventh Circuit addressed this issue and concluded that a debtor is entitled to the deduction even when the debtor has no actual expenses for owning the vehicle, like debt or lease payments.¹⁹

This Comment attempts to resolve the split among these courts. Proceeding in four sections, it explains that although Sec. 707(b)(2)(A)(ii)(I)'s language and legislative history are ambiguous, policy considerations dictate that the vehicle ownership expense deduction should be disallowed for vehicles that do not require actual ownership expenses on the bankruptcy petition date.²⁰Part I describes the purpose of the means test in both chapter 7 and chapter 13 cases and how the vehicle ownership expense deduction functions in those cases. Part II analyzes conflicting interpretations of the vehicle ownership expense deduction based on Sec. 707's ambiguous legislative history and text and explains how a proper construction of that statute prohibits the deduction when debtors have no actual expenses for owning a vehicle. Part III analyzes additional policy arguments that inform the debate surrounding vehicle ownership expense deductions. Part IV summarizes these arguments, concludes that the vehicle ownership expense deduction should not apply to debtors having no actual expenses for owning a vehicle, and describes the important implications of resolving this issue for debtors, creditors, and practitioners.

I. PROCEDURE FOR PERFORMING CALCULATIONS UNDER THE MEANS TEST

This Part first explains how the means test works in consumer bankruptcy. After explaining how the means test determines whether a court allows a debtor to remain in chapter 7, converts the case to a chapter 13 case, or dismisses the case altogether, this Part then explains how the vehicle ownership expense deduction plays an important role in making this determination. Finally, this Part explains how the Code's vehicle ownership expense deduction incorporates information published by the Internal Revenue Service for collecting delinquent taxes and how this information affects the vehicle ownership expense deduction in consumer bankruptcy cases.

A. The Means Test

A debtor may seek bankruptcy relief by filing a petition under either chapter 7 or chapter 13.²¹Under both chapter 7 and 13, the debtor must use the means test formula provided in Sec. 707(b)(2)(A)(i) to calculate his or her "current monthly income." Although identical in both chapters, the current monthly income calculation serves different purposes in chapter 7 and chapter

13.

When a debtor files under chapter 7, a court will decide whether the debtor's filing creates a presumption of abuse.²²This presumption of abuse arises if the debtor's "statutorily defined 'current monthly income,' . . . reduced by defined allowances for living expenses and payment of secured and priority debt . . . is high enough to at least equal defined trigger points"-or thresholds set in the Code.²³If the presumption of abuse arises, the court either dismisses the debtor's case or converts it to a chapter 13 proceeding.²⁴Alternatively, when a debtor files for chapter 13 relief or when a court converts a case to chapter 13, courts consider the debtor's current monthly income to determine whether the debtor has sufficient projected disposable income to repay creditors during a three- or five-year chapter 13 repayment plan.²⁵

Even when a debtor in chapter 7 passes the means test without conversion or dismissal for presumed abuse, a court may still dismiss the case by considering the "totality of the circumstances" under Sec. 707(b)(3)(B).²⁶When looking at the totality of the circumstances, the court uses its discretion to decide whether the debtor's case should be dismissed from chapter 7 proceedings due to fraud or abuse, even when the debtor appears to have insufficient income to pay creditors under a chapter 13 payout plan.²⁷

B. Vehicle Expense Deductions Under the Bankruptcy Code

The Code allows debtors to deduct certain expenses from their current monthly income calculations.²⁸When totaled, these deductions comprise the debtor's total applicable defined allowances for living expenses.²⁹

Among these allowances, the Code deducts certain transportation costs as "applicable monthly expense[s]" under Sec. 707(b)(2)(A)(ii)(I), including qualified vehicle ownership expenses.³⁰Section 707(b)(2)(A)(ii)(I) states that "the debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local

Standards."³¹These standards are deduction amounts published by the IRS.³²

Thus, to determine whether a debtor's transportation expense is among the monthly expenses "applicable" under Sec. 707(b)(2)(A)(ii)(I), one must consult the IRS Standards.³³

C. IRS Standards and Treatment of...