Tuesday, December 23, 2008

Last Week's New Circuit Court of Appeals Opinions on BAPCPA: Vehicle Expense Under Means Test; Constitutionality of No Advising to "Incur More Debt"

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

In Ross-Tousey v. Neary (In re Ross-Tousey)
Seventh Circuit Court of Appeals Case No. 07-2503 (02008 WL 5234070)
December 17, 2008

Hersh v. U.S (In re Hersh)
Fifth Circuit Court of Appeals No. 07-10226
December 18, 2008

These two Circuit Court opinions of last week continue the long march of BAPCPA issues through the appellate courts. In the first of these, the Seventh Circuit is the first Circuit Court to decide an issue that had evenly split the four BAP's which had addressed it, one of which was the 9th Circuit's BAP: whether a debtor who has no monthly vehicle loan or lease expense can claim a vehicle ownership deduction when applying the means test. In the other opinion, the Fifth Circuit weighed in on and came to a different conclusion on an issue that has been addressed in the Eighth Circuit and is currently before the Ninth Circuit (in a case which arose out of the Oregon Bankruptcy Court): the constitutionality of BAPCPA's sections 526(a)(4) and 527(b), part of the "debt relief agency" provisions which prohibit an attorney from advising his or her client "to incur more debt in contemplation of" filing for bankruptcy.

The Seventh Circuit Ross-Tousey opinion is the subject of this Bulletin, this Friday's Bulletin will be about the Fifth Circuit Hersh opinion.

Vehicle Ownership Expense Under Means Test When No Debt or Lease Payment

The Seventh Circuit, based out of Chicago, faced the issue "whether an above-median-income debtor who has no monthly vehicle loan or lease payment can claim a vehicle ownership expense deduction when calculating his disposable income." The Court said "yes" in reversing the district court.

Debtors filed a Chapter 7 case, and since their CMI, "current monthly income," exceeded the applicable median income level, they were subjected to the means test to determine whether or not they were required to convert to a Chapter 13 case. The pertinent statute is the Bankruptcy Code's § 707(b)(2)(A)(ii)(I) which permits debtors to deduct:
the debtor’s applicable monthly expense amounts specified under the [IRS’s] National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides . . . . Notwithstanding any other provision of this clause, the monthly expenses of the debtor shall not include any payments for debts.
Pursuant to this the debtors claimed the IRS Local Standards for vehicle operating/public transportation allowance of $358 and the vehicle ownership allowance of $803 (for two vehicles), which resulted that the means test showed them having no disposable income, thus permitting these debtors to proceed with their Chapter 7 case. In response to a motion by the U.S. Trustee to dismiss for abuse under § 707(b)(2), on grounds that the debtors were not permitted to take the $803 vehicle ownership allowance resulting in a presumption of abuse under the means test, the bankruptcy court for the Eastern District of Wisconsin denied the motion to dismiss and permitted this vehicle ownership allowance event though the debtors had no loan or lease payments on their two vehicles. The district court reversed, holding that the debtors could not claim this allowance since they had no monthly payments on the vehicles.

In the Seventh Circuit's statutory interpretation it looked to the plain language of the statute defining "monthly expenses" quoted above, at the legislative history, and at the underlying policies of the means test.

It acknowledged the 2-2 split among the four BAP's that have addressed this issue, those in the Sixth and Tenth Circuits having concluded that the car ownership allowance is permitted when debtors do not have loan or lease payments, and those in the Eighth and Ninth Circuits to the contrary. (The Ninth Circuit BAP opinion is In re Ransom, 380 B.R. 799; Judge Randall Dunn of the Oregon Bankruptcy Court wrote the opinion for the unanimous panel, affirming the bankruptcy court in Nevada.) All four of those BAP opinions have been decided within the last year.

The Seventh Circuit chose the "plain language" instead of the "Internal Revenue Manual" approach, holding that "the Local Standard vehicle ownership deduction 'applies' to the debtor by virtue of his geographic region and number of cars, regardless of whether that deduction is an actual expenses."

The Court found "no indication that Congress intended the [Internal Revenue Manual" methodology to be used in conducting the means test." Indeed the exclusion from the final version of the statute of a phrase which would have required the use of this methodology--"as determined under the Internal Revenue Service financial analysis"--"indicates Congress's intent that courts not be bound by the financial analysis contained in the IRM and supports the conclusion that courts should look only to the numeric amounts set forth in the Local Standards."

Finally the Court cited the "practical reasons" that the Internal Revenue Manual gives IRS officers substantial discretion contrary to Congress's intent to establish "a uniform, bright-line test that eliminates judicial discretion," and the "common sense that there are costs associated with vehicle ownership apart from loan or lease payments," including "depreciation, insurance, licensing, fees and taxes" as well as the greater likelihood of the need to replace a car for which payments are no longer being made.

Bottom Line
In the Seventh Circuit, the expenses provided for in the IRS's National and Local Standards, such as housing expenses, should be used as allowances and not as caps on expenses. And although the U.S. Trustee can still file motions for dismissal under § 707(b)(3) for bad faith or based on the totality of the circumstances, there is no presumption of abuse by the debtor and the burden of proof will be on U.S. Trustee.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

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