Articles & Resources View More Articles

The Supreme Court Rules That Chapter 13 Debtor Cannot Take an Ownership Deduction for a Paid-Off Car
February 15, 2011  /  by Jay Reding Bookmark and Share
In the first opinion authored by Justice Elena Kagan, the Supreme Court ruled that a Chapter 13 debtor may not deduct the “ownership costs” of a vehicle under the means test when he owes no further payments on the vehicle, affirming a decision of the Ninth Circuit Court of Appeals. The 8-1 opinion featured a pro-debtor dissent by Justice Scalia.

The case involved the calculation of how much disposable income a Chapter 13 debtor has in which to pay off creditors. Ransom argued that he should be allowed to take a $471/month deduction for the ownership costs of his vehicle, despite the fact that he had paid the vehicle off. His credit card company disagreed: they stated that Ransom should have been unable to take the deduction and the $471 should have gone towards his creditors.

The Supreme Court sided with the credit card company. The majority opinion ruled that the statutory language that “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards” uses the word “applicable” as a filter, and that the debtor may only take the deduction if “it is appropriate for him.” Using IRS guidelines on the National and Local Standards, the Court held that the deduction is only appropriate where the debtor has not fully paid off the vehicle.

Justice Scalia disagreed: he argued that the term “applicable” meant that the debtor should be able to take the deduction based on the number of cars the debtor owns. Focusing on the language of the Bankruptcy Code itself, Justice Scalia argued that the debtor’s interpretation of the statute was reasonable, and that there are other deductions in the Bankruptcy Code that are only to be taken if “reasonable and necessary.” Justice Scalia stated that he found it “strange” that Congress would have intended to so narrowly limit the vehicle ownership deduction merely by using the word “applicable.”

While this case is mainly of interest to bankruptcy practitioners, it does suggest a new dynamic on the Court. A new Justice’s first opinion is typically a unanimous opinion on an uncontroversial topic. But Justice Scalia’s spirited dissent suggests that there may be some significant disagreement between the ends of the ideological spectrum on the Court.

If you require assistance on any bankruptcy matters, contact Larkin Hoffman’s Bankruptcy attorneys.