A Fork in the Road: Courts Split on Transportation Ownership Deductions

Posted: 4 years 37 weeks ago
By: Tracy Keeton
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In the case of Tate v. Bolen (In re Tate),[1] the Fifth Circuit held that for the purposes of calculating monthly income deductions under the “means test,”[2] a chapter 7 debtor may deduct a transportation ownership expense for a vehicle that is not encumbered by any debt or lease. In January 2007, the Tates sought to file for Chapter 7 bankruptcy. After filing, they were subject to the “means test” added to the Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The purpose of the means test is to determine whether debtors have sufficient disposable income to repay a portion of their debt to creditors, which was at least $166.67 a month (or at least $10,000 over 5 years) at the time of the Tates’ bankruptcy filing, and if so, a chapter 7 proceeding is presumptively abusive.[3] 
The Tates filed for chapter 7 bankruptcy, claiming a monthly disposable income of $137.66. The bankruptcy trustee objected to the Tates’ deduction of transportation ownership expenses for their two vehicles which they owned outright and free of any liens or encumbrances. Without the deduction, the Tates’ disposable monthly income would have exceeded the section 707(b) threshold, rendering their chapter 7 proceeding presumptively abusive. The Bankruptcy Court for the Southern District of Mississippi[4] agreed with the trustee, and held that the Tates should not have deducted their two outright owned vehicles under the ownership deduction and that their proceeding was presumptively abusive and therefore should be dismissed. The district court[5] affirmed and the Tates appealed to the Fifth Circuit.
The “means test”, set forth at 11 U.S.C. § 707(b)(2)(A)(ii)(I) (2006), states that a debtor’s monthly expenses should be calculated to include “applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for categories specified as Other Necessary Expenses . . . . ”. The section mentions both “actual monthly expenses” and “applicable monthly expenses.” Courts have disagreed as to the scope of these terms, mainly whether a debtor can deduct a monthly expense that the debtor is not actually paying but that is “applicable” to the debtor under the National or Local Standards, or whether the debtor must actually be laying out money for expenditure before it is an “actual” deductable expense.
The Fifth Circuit in In re Tate relied on one version of the “plain language” approach when analyzing section 707 that was first promulgated by the Seventh Circuit in Ross–Tousey v. Neary (In re Ross–Tousey),[6] a decision which resulted in the allowance of an ownership deduction. Like In re Ross–Tousey, In re Tate relied on the distinction between the words “applicable” and “actual” contained in section 707(b)(2)(A)(ii)(I).[7] The court defined “applicable” National and Local Standards to mean the combination of the debtors’ geographic region and number of cars possessed by the debtor, regardless of whether the cars are encumbered. This is because “applicable” expenses cannot mean the same thing as “actual” expenses, both of which terms are used in section 707(b)(2)(A)(ii)(I), and the two words are not synonymous.[8] The Fifth Circuit noted that some courts might prohibit the transportation ownership deduction for vehicles owned outright if they chose to follow the IRM approach. The IRM approach takes into account how the IRS uses the Local Standards, mentioned in section 707(b), in its revenue collection processes. The IRS would disallow a deduction for a taxpayer who owns a vehicle outright, and thus courts using the IRM approach prohibit the transportation ownership deduction for a debtor whose vehicle is unencumbered.[9]
Since the In re Tate decision was rendered, two more courts have interpreted this same statutory language in the context of chapter 13 bankruptcy proceedings. Ransom v. MBNA America Bank N.A. (In re Ransom),[10] a Ninth Circuit case, and ECast Settlement Corp. v. Washburn (In re Washburn),[11] an Eighth Circuit case, dealt with whether an ownership deduction could be claimed for a vehicle owned outright under section 707(b)(2)(A)(ii)(I) to calculate projected disposable income for purposes of a chapter 13 plan. In re Washburn, using the same interpretation of the “plain language” of section 707(b) as In re Tate, allowed the deduction.[12] Conversely, In re Ransom disallowed the deduction, yet claimed that it too was using the plain language approach. The In re Ransom court referred to the transportation ownership deduction as an “ownership cost deduction” and thus held that this was a cost that the debtor did not have.[13]
This poses an interesting circuit split for future courts to deal with, because this statutory construction issue affects both chapter 7 and chapter 13 proceedings. Courts that disallow the deduction might be encouraging debtors to borrow rather than pay off a car loan if they are nearing bankruptcy in order to receive the ownership deduction.[14] Courts that allow the deduction need to clarify their interpretations of the section 707(b), because too literal of a reading could mean double counting for a debtor: a debtor could deduct an encumbered car from its actual and applicable monthly expenses.[15]

[1] 571 F.3d 423 (5th Cir. 2009).
[2] 11 U.S.C. § 707(b)(2)(A)(ii)(I) (2006).
[3] Tate v. Bolen (In re Tate), 571 F.3d at 425. Prior to BAPCPA, section 707(b) called for a dismissal or conversion of a chapter 7 bankrupcty proceeding when there was a finding of “substantial abuse” by the debtor.
[4] In re Tate, No. 07-50028 ERG, 2007 WL 4532122 (Bankr. S.D. Miss. Dec. 18, 2007).
[5] In re Tate, No. 1:08cv32HSO-JMR, 2008 WL 4489761 (S.D. Miss. Sept. 29, 2008). Because there was no binding authority in the Fifth Circuit at that time, the district court relied on In re Brown, 376 B.R. 601 (Bankr. S.D. Tex. 2007), as persuasive authority. The court in In re Brown reasoned that the debtors were not entitled to deduct vehicle ownership expenses for motor vehicles unless they had some monthly note or lease payment. 
[6] 549 F.3d 1148 (7th Cir. 2008).
[7] In re Tate, 571 F.3d 423, 426–27 (5th Cir. 2009).
[8] Id. The court also relied on Congressional intent and policy considerations; mainly that a vehicle owner should not be punished for paying off their car in a timely manner and that a vehicle owner might need replacement transportation during the course of bankruptcy proceedings.
[9] Id.at 426.
[10] 577 F.3d 1026 (9th Cir. 2009).
[11] 579 F.3d 934 (8th Cir. 2009).
[12] Id. at 937.
[13] In re Ransom, 577 F.3d at 1030.
[14] See 6 Collier on Bankruptcy, ¶ 707.05[2][c], at 707-45 (Alan N. Resnick et al eds., 15th ed. rev. 2006).
[15] See 6 Collier on Bankruptcy, ¶ 707.05[2][c], at 707-43 (Alan N. Resnick et al eds., 15th ed. rev. 2006).