Back on October 5, we reported on arguments before the U.S. Supreme Court about whether certain expenses could be deducted when making the disposable income calculation for a Chapter 13 bankruptcy repayment plan.

The case argued before the court in October involved a Chapter 13 debtor who owned his car free and clear, but wished to take advantage of the standard deduction of “applicable monthly expense amounts” for car-ownership expenses. The debtor had argued that, although he didn’t have a car payment, he still had car-related maintenance and repair expenses, as well as the cost of the car’s depreciation.

One of his creditors had objected to his proposed plan, and the dispute had gone all the way to the Supreme Court. In response to the debtor’s arguments, the creditor claimed that the U.S. Bankruptcy Code directs debtors to calculate their car-ownership expenses using the Internal Revenue Service manual. The IRS manual only includes monthly loan and lease payments for automobiles.

The Supreme Court’s ruling has just been issued. Unfortunately, the Court ruled 8-1 against the debtor. In this two-part series, we’ll discuss the arguments, the Court’s reasoning, and Justice Antonin Scalia’s dissent.

Are car repair, maintenance and depreciation costs ‘reasonable expenses’?

Under the U.S. Bankruptcy Code, a Chapter 13 debtor sets up a three- to five-year debt repayment plan based on ability to pay. The plan is based on the debtor’s “projected disposable income” — his or her post-tax income minus “reasonable” monthly expenses. Those expenses are referred to as “deductions.”

The Bankruptcy Code defines the debtor’s car-ownership expense deduction as the “applicable monthly expense amounts specified under the national standards and local standards … issued by the Internal Revenue Service.”

What that means in practice is that the deduction for car-ownership expenses is a specific fixed amount drawn from a table, not necessarily the actual monthly payment amount. As Justice Scalia pointed out in his dissent:

“A debtor entering bankruptcy might purchase a junkyard car for a song plus a $10 promissory note payable over several years, [but he] would get the full ownership expense deduction.”

This Chapter 13 debtor argued that the Bankruptcy Code’s reference to the IRS manual was not intended to mean that the chart in the manual was the only way to determine “reasonable” car-ownership expenses. The IRS manual, he pointed out, is intended as a set of internal guidelines IRS agents use to determine the appropriateness of certain tax deductions.

What deductions are considered “reasonable” under the current U.S. Bankruptcy Code is an ongoing source of confusion, points out one bankruptcy lawyer interviewed by Westlaw News & Insight. The fact that such an issue has to be decided by the Supreme Court, he pointed out, “highlights the confusion and lack of clarity with which bankruptcy courts have struggled and will continue to struggle until the legislation is re-written.”

In the second part of this series, we will examine the Supreme Court’s reasons for denying the debtor’s deductions, along with the dissenting opinion by Justice Scalia. Visit this blog again to learn more, or subscribe to our RSS feed to receive automatic updates.

Source: Westlaw News & Insight, “No car payments means no ownership-cost deduction, Supreme Court rules,” January 11, 2011