The Bankruptcy Appellate Panel of the 9th Circuit recently rejected the argument that deducting the $200 older vehicle expense was allowable. The BAP in In Re Leudtke founds that the IRS National and Local Standards do not allow for the deduction of a $200 vehicle operating expense when the debtor owns the vehicle outright.
The means test allows a debtor to deduct the full ownership expense for a vehicle, when the debtor is leasing or financing a vehicle. The Supreme Court in In Re Ransom, established that debtors who did not lease or finance a vehicle, could not deduct the full ownership costs for the vehicle. If a debtor did not have a lease or car loan payment, then they were not allowed to deduct the ownership expense on the means test. The U.S. Supreme Court in In Re Ransom, did not directly address the issue of deducting an additional operating expense for older vehicles under the means test.
The decision In Re Ransom, left concerns about debtors who owned older vehicles with no car payments. The decision left these debtors with no cushion for potential emergency repairs on these vehicles. Generally vehicles that are owned outright have a significant amount of miles and are older. The decision in In Re Ransom, does not allow debtors to deduct an ownership expense that would reduce their overall disposable income on the means test.
Debtors however continued to take an additional $200 deduction as an operating expense for vehicles that were 6 years or older or had 75,000 miles or more. Under the IRS Internal Revenue Manual, a debtor is generally allowed to take a $200 additional operating expense for older vehicles. The section of the IRS Manual in which this is discussed applies to the IRS conducing investigations for a taxpayers offer in compromise and to determine their financial condition for collection efforts.
When a debtor files for Chapter 13 bankruptcy protection, the debtors disposable income is calculated by looking at the currently monthly income minus reasonable expenses. The debtors ability to pay is calculated using the means test analysis which uses the expenses based on the IRS National Standards and Local Standards. The formula used to calculate the debtors ability to pay creditors is a mechanical formula that is defined in section 707 of the bankruptcy code. It applies to above median income Chapter 13 debtors by section 1325(b)(3) of the Bankruptcy code.
The recent decision in In Re Leudtke may prohibit an additional $200 operating expense for vehicles, which would result in higher disposable income. This may require in some circumstances that the debtor in the 9th circuit (California, Arizona, Nevada, Montana, Oregon, Washington, Alaska and Idaho, Hawaii) pledge a higher monthly payment into their Chapter 13 plan. Debtors may be required to pledge higher monthly payment amounts based on the calculations of disposable income if a $200 vehicle operating expense is not allowed.
Are Debtors in the 9th Circuit Stuck with A Higher Payment in A Chapter 13 Bankruptcy?
First the decision was issued by the Bankruptcy Appellate Panel of the 9th circuit which may not be binding precedent that must be followed. The 9th circuit has not issued an opinion finding that the BAP decisions are binding on courts in the 9th circuit, although the BAP has held this. This means that the courts can use this case to support the position that the $200 operating expense is not allowed but they may not be required to follow this decision as binding precedent. The reality is that bankruptcy judges will likely defer to the BAP decisions as binding precedent.
Second, if the debtors have actual operating expenses for the vehicle that are higher than the operating expenses deduction on the means test then they can utilize special circumstances. The debtor can argue special circumstances that justify the higher additional expenses for the vehicle.
Further the decision In Re Lanning has held that projected disposable income can account for changes in the debtor's income and expenses that are known or virtually certain at the time of confirmation. If the debtor has higher operating expenses than the allowed deductions for his vehicles at the time of confirmation, his projected disposable income should be lowered based on these expenses. The ruling in Lanning, takes a forward-looking approach to projected disposable income rather than simply basing the ability to pay on a mechanical formula.
Whether the courts in the 9th circuit will follow the decision of the BAP remains unknown.