In one of its first cases of the term, the U.S. Supreme Court heard a Chapter 13 bankruptcy case on October 4. The case involves what deductions a debtor can take from his discretionary income when setting up a Chapter 13 repayment plan.

In this case (Ransom v. FIA Card Services NA, 09-907), Jason Ransom filed for bankruptcy in Nevada in 2006. When filling out the form to determine his discretionary income — his income minus reasonable expenses — Ransom included an expense of $471 in “vehicle ownership costs.” The problem? Ransom’s car is completely paid off.

The question is whether all of the basic costs associated with the ownership of a vehicle are considered reasonable expenses under bankruptcy law, or only monthly car loan or lease payments.

Ransom said his $471 per month in “vehicle ownership costs” represented the total of a number of costs, such as maintenance, repairs and replacement costs. The objecting creditor, FIA Card Services, argues that bankruptcy law only allows debtors to deduct loan and lease expenses from the income they have available to pay creditors.

At stake is a total of approximately $28,000 over the course of the five-year Chapter 13 repayment plan.

Debtor Argues the Bankruptcy Statute Is Clear; Justices Skeptical

Ransom’s bankruptcy attorney Christopher Burke says the U.S. Bankruptcy Code allows debtors to reduce their available income by all “applicable” deductions as defined by IRS standards, which are laid out in a chart.

FIA Card Services responds that Congress meant for debtors to refer to the IRS manual when determining which deductions are applicable. In the IRS manual, car ownership expenses are defined as car loan or lease payments.

Burke pointed out that the bankruptcy code does not define the term “ownership expenses” but refers to the chart of IRS standards. He contends that the IRS manual is basically an internal document of discretionary guidelines intended for the use of IRS agents. He says it would be unreasonable for the law to require individual Chapter 13 bankruptcy debtors to know the intricacies of the “almost incomprehensible” IRS manual.

Attorneys for FIA Card Services and the Justice Department argued that the point of the deduction of reasonable expenses is to determine how much money a debtor has to repay his creditors, not to quibble over whether the debtor owns a car. Ransom shouldn’t be allowed to shield $471 a month from creditors by calling it a reasonable expense when he “has no expense whatsoever.”

“Nobody is shielding anything,” Burke responded. “It’s all black and white on his current expenses. If he doesn’t have it, he is not getting it.”

Justice Stephen Breyer said the language in the IRS manual itself was “very, very clear” and pointed out that if a debtor bought a dozen apples every month, he couldn’t include them in his car ownership expenses simply because he was using them to decorate his car.

“It’s for ownership,” Breyer said, “it’s not for, for example, whistling.”

The other Justices’ questions also seemed skeptical of the debtor’s case.

The 9th Circuit Court of Appeals ruled in favor of FIA Card Services, but the Supreme Court only takes cases it thinks involve serious and controversial issues. A final ruling is not expected until next year.

Source:

Courthouse News Service, “Supreme Court Opens With Bankruptcy Case,”  October 4, 2010