Advocating For Consumers In Bankruptcy Filings For More Than 25 Years

Supreme Court nixes Chapter 13 plan deduction for paid-off car – 2

On Behalf of | Jan 18, 2011 | Chapter 13 Bankruptcy, Firm News

The U.S. Supreme Court recently issued its ruling in a Chapter 13 bankruptcy case where the debtor wished to deduct reasonable expenses for car ownership from his projected disposable income for the purposes of his Chapter 13 bankruptcy repayment plan. A deduction for a monthly loan or lease payment is standard. In this case, however, the debtor owned his car free and clear and wanted to deduct projected expenses for maintenance, repair and depreciation instead.

The Supreme Court ruled 8-1 against the debtor, with Justice Antonin Scalia dissenting.

In the first part of this series, we discussed how reasonable monthly expenses are taken into account when setting up the three- to five-year debt repayment plan in a Chapter 13 bankruptcy, and the arguments the debtor made on behalf of his proposed deduction. In this part, we will explain the Supreme Court’s reasoning for rejecting his deduction, along with Justice Scalia’s dissent.

Rejection of Chapter 13 debtor’s claim hangs on the word ‘applicable

The U.S. Bankruptcy Code allows Chapter 13 debtors to deduct “applicable monthly expense amounts” from their after-tax income when determining what resources they have available to pay off their debts. In her first written decision for the high court, Justice Elena Kagan rejected the debtor’s arguments that his projected expenses should be considered “applicable monthly expense amounts.”

The key word is “applicable,” Kagan wrote.

The debtor had argued that the word “applicable” was intended to instruct Chapter 13 filers to go through the table referred to in the statute, find their geographic location, and thereby locate the amount they could deduct.

Kagan and the majority instead said the word “applicable” was intended to tell Chapter 13 filers to look at the list of deductions and determine whether they had expenses in those categories before taking a deduction. Otherwise, filers might think they should take all of the deductions regardless of whether they had occurred actual expenses.

“Because [the debtor] owns his car free and clear of any encumbrance, he incurs no expense,” Kagan wrote. “Accordingly, the car-ownership expense amount is not ‘applicable’ to him.”

Furthermore, the majority reasoned, Congress intended to allow Chapter 13 debtors to hold back some money from the repayment of their creditors in order to meet the natural expenses of everyday life. However, that amount was intended to minimal, and thus could only include “reasonably necessary” expenses.

“Expenses that are wholly fictional are not easily thought of as reasonably necessary,” Kagan said.

In part of his dissent, Justice Scalia criticized the majority’s sense that their interpretation was the one that would best minimize unreasonable expenses by debtors. The car-ownership deduction granted to each debtor is a fixed number determined by a chart, not their actual car payment, he pointed out. Each Chapter 13 debtor in a particular geographic area gets the same amount deducted, regardless of whether they drive a Lexus or a junkyard car.

Therefore, a junkyard car-driving debtor might get a higher deduction than this case’s debtor would if he deducted his full complement of projected expenses. Therefore, he concluded, the majority can’t fairly base their reasoning on Congress’s intention to minimize these deductions.

Repairs and maintenance may not be needed every month, but projecting that they will be needed is sound budgeting. The cost of depreciation of a car may not be an expense, but it is real. Saving up to pay for a new car when your existing one no longer works would be considered smart planning for most people. Do you think these types of projected expenses should have been considered reasonable?

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

Our Blog