On a question where the courts are divided, Bankruptcy Judge John S. Hodge of Shreveport, La., ruled that debt service for a non-purchase money lien on an automobile is not deductible in calculating a chapter 13 debtor’s disposable income.
The chapter 13 debtors purchased a truck nine years before filing and had paid off the original auto loan. A year before filing, they borrowed $4,600 from their credit union, took down the cash and gave the lender a perfected, non-purchase money security interest in the truck. They scheduled the truck as worth $5,000.
Above median income, the debtors calculated their monthly disposable income on Official Form 122C-2. They claimed three deductions: (1) the monthly payment on the note to the credit union; (2) the standardized monthly IRS deductions for operating costs; and (3) the standardized IRS ownership costs.
No one objected to (1) and (2). In his September 18 opinion, Judge Hodge sustained the objection by the chapter 13 trustee to (3), the standardized IRS ownership costs, thereby increasing the debtor’s plan payments by $534.80 a month.
Judge Hodges trudged through the Bankruptcy Code’s definitional maze and the Code’s reliance on IRS guidelines, which determine how much the government can collect from a taxpayer for delinquent taxes.
While projected disposable income is not defined in the Code, disposable income is defined in Section 1325(b)(2) to mean “current monthly income received by the debtor . . . less amounts reasonably necessary to be expended.”
The IRS guidelines are incorporated into the Bankruptcy Code by Section 8707(b)(2)(A)(ii)(I). It defines “amounts reasonably necessary to be expended” 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 for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor . . . . [Emphasis added.]
The “key word” is “applicable,” Judge Hodges said.
The IRS Local Standards include transportation allowances for both ownership costs and operating costs. In the case at hand, the issue revolved around ownership costs.
In Ransom, the Supreme Court said that ownership costs “encompass[] the costs of a car loan or lease and nothing more.” Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 70 (2011).
Because the non-purchase money lien on the truck might loosely be considered a “car loan,” Judge Hodges delved deeper into the IRS guidelines.
In Ransom, the Supreme Court said that ownership costs were derived from new and used car financing data compiled by the Federal Reserve. He then held “that the amounts listed in the current Ownership Costs table are based on the five-year average of new and used car financing data.”
Judge Hodges noted that Federal Reserve data separately classifies loans made for non-purchase money obligations.
Although courts are divided, Judge Hodges followed the majority and held that “expense amounts listed in the Ownership Costs category are applicable to a debtor only if he incurs monthly expenses associated with acquiring use of the vehicle, either through a lease or a purchase-money loan.” He sustained the chapter 13 trustee’s objection because debt service on the non-purchase money loan was not “reasonably necessary to be expended.”
Scholarly Commentary
Former Bankruptcy Judge Keith Lundin told ABI that “Bankruptcy Judge Hodges takes the noncontroversial view that only purchase money loans trigger entitlement to the ownership expense deduction. A few courts say otherwise, but not many.”
Judge Lundin is one of the country’s leading commentators on chapter 13. See his treatise, LundinOnChapter13.com.
On a question where the courts are divided, Bankruptcy Judge John S. Hodge of Shreveport, La., ruled that debt service for a non-purchase money lien on an automobile is not deductible in calculating a chapter 13 debtor’s disposable income.
The chapter 13 debtors purchased a truck nine years before filing and had paid off the original auto loan. A year before filing, they borrowed $4,600 from their credit union, took down the cash and gave the lender a perfected, non-purchase money security interest in the truck. They scheduled the truck as worth $5,000.
Above median income, the debtors calculated their monthly disposable income on Official Form 122C-2. They claimed three deductions: (1) the monthly payment on the note to the credit union; (2) the standardized monthly IRS deductions for operating costs; and (3) the standardized IRS ownership costs.