The Decision
On January 11, 2011, the US Supreme Court handed down a decision in Ransom v. FIA Card Services, N.A., fka MBNA America Bank, N.A., No. 09-907. Ransom involves an over-median-income debtor in a Chapter 13 case who claimed standard vehicle-ownership and vehicle-operation expenses as part of his disposable income calculation (B22C). The debtor's vehicle was free and clear of liens and a creditor in the case objected to his claim of vehicle-ownership deduction. The bankruptcy court upheld the objection reasoning that a debtor should not be permitted to claim a vehicle-ownership deduction on a vehicle with no lien payment. The Ninth Circuit Appellate Panel and the Ninth Circuit upheld that decision. The question was then taken up by the U.S. Supreme Court which ruled 8-1 to uphold the decision of the Ninth Circuit to wit: a Chapter 13 debtor who does not make loan or lease payments may not take the car-ownership deduction.
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The Results
As a result of the decision in Ransom, all new Chapter 13 cases in which debtors own vehicles free and clear of liens may not include a vehicle-ownership cost as part of the disposable income calculation. In addition, any filed but unconfirmed Chapter 13 cases may be subject to change in disposable income calculation.
Like the other standards on the means test, the vehicle-ownership expense continues to be a black and white proposal: debtors either qualify for the whole thing or they qualify for nothing at all. Even cars with small liens against them will qualify for the full vehicle-ownership expense of $496.00 per month. Something for attorneys to consider now is whether it would be in the best interest of a debtor to trade a free and clear vehicle for one with a lien or borrowing against it in order to reduce monthly disposable income.
However, since debtors' attorneys have been designated "debt relief agencies" (see Milavetz, Gallop & Milavetz, P. A., et al. v. United States, No. 08-1119), they are not permitted to "advise an assisted person or prospective assisted person to incur more debt... " (11 U.S.C. 526 (a)(4)). This will present a delicate balance for debtors' attorneys between making clients fully aware of all legal options that would be in their best interest and following the edict of the code not to advise clients or prospective clients to incur more debt.
Potential Repercussions
There is some potential for the application of this decision to expand from Chapter 13 debtors only to both Chapter 7 and 13 debtors. This application has the potential to push a number of cases from Chapter 7 to Chapter 13. In addition, Chapter 13 cases in which a debtor does not have a car payment but subsequently purchases a financed vehicle during the life of the case will have to be modified to reflect this new expense. This could lead to a slew of Motions to Modify Confirmed plans.
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