Consumer Bankruptcy Committee

ABI Committee News

New Ransom Decision Opens or Closes Doors?

The manipulation of the current monthly income (CMI) schedule [Bankruptcy Form B22] by bankruptcy practitioners has been subject of many bankruptcy court opinions and, such concern culminated with a 2011 opinion by the U.S. Supreme Court—Ransom v. FIA Card Services NA [1]. One of the better expenses to include would be the car expenses of one or two or more vehicles, even when a debtor may own the vehicle free and clear of all liens. The majority of circuits ruled in favor of allowing a debtor to include such motor vehicle expenses, while the creditors persisted in arguing that the same was in violation of the language of the Bankruptcy Code and legislative intent of the Bankruptcy Abuse Prevention and Consumer Protection Actof 2005(BAPCPA). Those issues were reviewed by the Supreme Court in Ransom, which has now made the creditors’ view the law of all jurisdictions; but, with this decision some very important questions remain unanswered.

The applicable provision of the Bankruptcy Code reads as follows:

The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the 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 [IRS] for the area in which the debtor resides. [2]

Section 707(b)(2)(A)(ii)(I)’s reference to the “the National Standards and Local Standards issued” by the IRS requires debtors to comply with the IRS-established standards in calculating taxpayers’ ability to pay delinquent taxes. The Collection Financial Standards provide that taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent. The local standards cover two categories of expenses: (1) housing and utilities, and (2) transportation. The “allowable living expenses for transportation” are broken down into “ownership costs” and “operating costs and public transportation.” It is the former costs that were at issue in Ransom.

The Ransom ruling disallowed monthly expenses if the debtor owned the vehicle free and clear of all liens. We now know that in bankruptcy, a debtor without a car payment does not receive the ownership cost deduction described by the IRS Financial Analysis Handbook. Ransom made bankruptcy akin to the world of collection by the taxing authority whose rulebook states that “[i]f a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense.” [3]

In bankruptcy, calculating the CMI is done with a form B22, which is a document delivered by computer software. It asks questions, and practitioners merely plug answers into the boxes. Ultimately, a tabulated answer is delivered stating one of two things: (1) presumption arises or (2) presumption does not arise. The term “presumption” calls for “presumption of abuse,” which describes if the debtor may continue in chapter 7 (and pay nothing to creditors) or must convert to either chapter 11 or 13 (and make a payment plan to creditors).

To illustrate how the software is not identical to the Bankruptcy Code or the IRS Manual, one merely needs to see how the questions are posed. In TopForm, the applicable question for costs appears as follows:

22A. Local Standards: transportation; vehicle operation/public transportation expense

Number of Vehicles

Census Region

23. Local Standards: transportation ownership/lease expense; Vehicle 1

Number of Vehicles

a. IRS Transportation Standards, Ownership costs

b. (-)Avg Monthly Payment for
 debts secured by Vehicle 1 (if any)

24. Local Standards: transportation ownership/lease expense; Vehicle 2

Number of Vehicles

a. IRS Transportation Standards, Ownership costs

b. (-)Avg Monthly Payment for debts secured by Vehicle 1 (if any)

In Ransom, the Court did something that the programmers understandably did not—it looked deeply into the language of the Bankruptcy Code. “Our interpretation…starts ‘where all such inquiries must begin: with the language of the statute itself.’” Upon reviewing § 707(b)(2)(A)(ii)(I), the court determined that the issue is about the definitions and congressional inclusion of the terms “applicable,” “monthly” and “expense.”

“Because the Code does not define ‘applicable,’ we look to the ordinary meaning of the term. See, e.g., Hamilton v. Lanning, 560 U.S. ___, ___, 130 S. Ct. 2464, 177 L. Ed. 2d 23, 33 (2010). ‘Applicable’ means ‘capable of being applied: having relevance’ or ‘fit, suitable, or right to be applied: appropriate.’ Webster's Third New International Dictionary 105 (2002). See also New Oxford American Dictionary 74 (2d ed. 2005) (‘relevant or appropriate’); 1 Oxford English Dictionary 575 (2d ed. 1989) (‘[c]apable of being applied’ or ‘[f]it or suitable for its purpose, appropriate’). So an expense amount is ‘applicable’ within the plain meaning of the statute when it is appropriate, relevant, suitable, or fit.” [5]

The term “expense” was merely synonymous with car payment, and the court concluded that “[b]ecause Ransom owns his vehicle free and clear of any encumbrance, he incurs no expense in the ‘Ownership Costs’ category of the Local Standards. Accordingly, the car-ownership expense amount is not ‘applicable’ to him, and the Ninth Circuit correctly denied that deduction.” [6]

The differences between the texts of the Bankruptcy Code and the text of the forms are probably a derivative of users’ request for simplicity. The computer program asks for “ownership” of motor vehicles, and then has the user input the amount of the monthly payment from the federally allowed amount. Therefore, if one does not have an expense for ownership, the user puts nothing in the box and the computer will deliver the default amount for the first or second vehicle ($496), which will not be excluded. The result of such programming is to grant a $496 credit against income in favor of the debtor. This particular inclusion of an expense when no actual lien payment exists was the issue in Ransom.

The alternatives that can be inputted in the same program include payments that are greater or less than the federally allotted amount. For instance, if a monthly car payment of $380 exists, the program would leave one with $116 at the first pertinent portion of the form with additional credit being given later in the form for $380 where secured creditor payments are allowed. If the payment exceeds the allotted amount of $496, the debtor is allowed full payment for the same. In short, if there were some type of payment, the debtor would receive credit either on line 23b or line 42 of form B22A. If the payment is less than the allowed amount, the debtor will receive credit on lines 23b and 42, which will total the $496. If the payment is greater than the federally gauged amount, the debtor will receive credit exceeding $496 on line 42 of form B22A. After the ruling in Ransom, if the debtor has no payments, he or she will not receive credit as to ownership, but will receive the deduction for operating costs.

This language-intensive review by the court may be correct on the letter of law, but it overlooked the practicality of bankruptcy practice. Quite simply, attorneys will be asked to engage in actions to circumvent the decision. The court, when delivered with this issue, had to contemplate the possibility of abusive or permitted practices that may occur in the future—any of which would defeat the decision. Justice Scalia wrote, “That is fairly matched by the imagined horrible that, under the Court's scheme, a debtor entering bankruptcy might purchase a junkyard car for a song plus a $ 10 promissory note payable over several years. He would get the full ownership expense deduction.” [7] Footnote 8 of the opinion addresses how various parties had briefed the court about this particular issue, but, this posed issue was only addressed in Scalia’s dissent.

The court’s decision not to rule on the issue of “whether or not a party with a junkyard heap would obtain a $496 credit” will be just one more reason why the Court may need to grant certiorari on a related and serious question: What “expense” is “reasonable” so as to permit the debtor to receive the full $496 credit? For instance, if a debtor has an insignificant payment of $10 a month for a vehicle, could that particular debtor be entitled to a credit of $486 on line 23b of form B22A and an additional $10 credit on line 43 of form B22A, which grants a total credit of $496? Why should a debtor who has no payments be disallowed any credit whatsoever while his neighbor with a $10 payment be allowed a credit of $496? It seems improper that a party who only makes a $10 payment would receive a full $496 credit while a debtor with no payments receives nothing. As important as this argument may be to some, it received no ruling by the court, and the allies on this issue were foes in the Ransom case. The U.S. Solicitor General, who sided with the creditor in Ransom, sided with the debtor in allowing the $496 credit to the hypothetical $10-per-month paying debtor described above. Not surprisingly, counsel for the credit card company disagreed on this unresolved issue—thereby awakening the author to conclude that this issue may be forthcoming.

The ridiculous result mentioned above is how the CMI becomes the topic of potential abuse. For instance, the debtor who has a motor vehicle owned free and clear of all liens, may choose to receive a motor vehicle loan from a relative prior to the filing to pay attorneys fees for the bankruptcy and make payments to that party for a period of 50 months so as to be entitled the full credit of $496 from the CMI’s B22 form. Counsel for the debtors, in making such arrangements, are often immunizing their clients from chapter 13 and permitting them to fully discharge the debt in chapter 7. Such planning would be beneficial to the clients, but may appear subject to suspicion by creditors and trustees.

Such planning cannot be disregarded. Finding loopholes in statutes or codes is definitional “good lawyering.” Positioning clients to comply with rulings or unambiguous language of code provisions requires attorneys, as skilled practitioners, to deliver methods or means to accommodate their clients’ best interests within the confines of the law. A decision such as Ransom may allow bankruptcy practitioners to have their clients enter into secured creditor arrangements prior to the filing, so as to avoid the draconian results of the Ransom decision.

A few main themes emerged from this decision. The lack of expense, which annulled the car credit in Ransom, may expand to disallow the board expenses to those living at home, or similar debtors who are protected souls of benevolent nondebtors. In short, Ransom may become a creditor’s weapon to be used for analogous concepts in the future. Alternatively, preparing for bankruptcy by buying junkyard cars or entering into de minimis loans should allow full credit of $496 for a worthless vehicle. In short, a debtor may be compelled to employ tactics to avoid the Ransom result. In either event, each interpretation will trigger more motions in the bankruptcy forum, deliver more appeals to district, appellate and circuit courts, and ultimately could well deliver a related certiorari request to the United States Supreme Court.

1. 562 U.S. ____ (January 11, 2011)

2. See 11 U.S.C. 707(b)(2)(A)(ii)(I).

3. IRS Financial Analysis Handbook, § (emphasis added).

4. Ransom at 4. United States v. Ron Pair Enterprises Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989), quoting

5. Ransom at 7.

6. Ransom at 11.

7. Ransom at 16-17.