The Ninth Circuit Bankruptcy Appellate Panel issued an opinion (In re Luedtke) last month holding that “above-median” Chapter 13 debtors may no longer claim a $200 “older vehicle operating expense” when calculating “disposable monthly income” for purposes of determining a Chapter 13 Plan payment. As a backdrop to this opinion, I would like to briefly discuss how monthly payments to the Trustee are set in Chapter 13 cases.
For “below-median” debtors (i.e., those with incomes below the median for the state of residence for a family of the debtor’s size), the payment is generally set by subtracting actual monthly expenses from take-home pay. So, for example, if a debtor’s take home pay is $2,000 per month, with living expenses of $1,800 per month, the payment to the Trustee is $200 per month. The Trustee, and ultimately the Court, determine whether the expenses claimed are reasonably necessary.
For “above-median” debtors (i.e., those with incomes above the median for the state of residence for a family of the debtor’s size), however, the allowable living expenses are determined primarily by the IRS’ national and local standard. These standards do not necessarily correspond to actual expenses, and were even described by the Luedtke court as representing “a formulaic and mechanical method of assessing debtors’ ability to pay”. The plan payment is then calculated by subtracting these allowable expenses from net monthly income.
The debtors in Leudtke owned two cars free and clear, and were unquestionably entitled to a $472 monthly deduction for vehicle operating expense. The dispute, however, arose because they also claimed a $200 “older vehicle operating expense” for vehicles which have more than 75,000 miles or are more than six years old. That additional expense allowance comes from the IRS’ Internal Revenue Manual. Prior to the Leudtke decision, courts were split on the allowance of the additional $200 expense.
In disallowing a Chapter 13 debtor from claiming the “older vehicle operating expense”, the Bankruptcy Appellate Panel argued that this expense came from neither the Collection Financial Standards nor the Allowable Living Expense Standards. Rather, it was a portion of the Internal Revenue Manual which dealt with standards for IRS agents to consider when reviewing a taxpayer’s request for an “Offer in Compromise”. The Panel therefore held that
“because the older vehicle operating expense is not set forth or referenced in the National Standards, in the Local Standards [the Collection Financial Standards and the Allowable Living Expense Standards], or in the [Internal Revenue Manual] commentary identifying and interpreting those standards, it was improper for the bankruptcy court to allow the older vehicle operating expense for purposes of calculating . . . disposable income.”
Obviously, this ruling is a disappointment for Chapter 13 debtors. It is axiomatic that older cars cost more to maintain than newer cars, and an extra allowance for such expenses is reasonable and necessary. Yet this is another example of how the rigid formulas adopted by Congress in its 2005 overhaul of the Bankruptcy Code fail to take into account common sense and practical reality. Particularly troubling was the Court’s insistence that only some portion of the IRS standards constitute the applicable National and Local Standards. Even more bizarre is the fact that the Panel disavowed one of its own prior cases and ignored Ninth Circuit precedent concerning the validity of the older vehicle operating expense.
“The bankruptcy court finally attempted to support its allowance of the older vehicle operating expense by relying upon the following from this Panel’s decision in In re Ransom:
‘Numerous safeguards are in place to protect both debtors and creditors. Debtors who own old or high mileage cars ‘free and clear,’ are entitled to an extra $200 per month operating expense. Also, a ‘free and clear owner is not ‘stuck with the vehicle operating expenses allowed under the IRS Standards. Section 707(b)(2)(B) is also available for ‘above the median’ Chapter 13 debtors. Section 707(b)(2)(B), allows additional expenses based on ‘special circumstances.’’
380 B.R. at 808 (emphasis added) (quoting In re Carlin, 348 B.R. 795, 798 (Bankr. D. Or. 2006)). Even though this portion of our Ransom decision later was adopted by the Ninth Circuit Court of Appeals, and even though the passage suggests that bankruptcy courts should allow the older vehicle operating expense, we are not bound by this language. The comments regarding the older vehicle operating expense were not necessary to the determination of the issue on appeal in that case – whether the debtor was entitled to claim vehicle ownership expenses when he owned the subject vehicle free and clear of any loan or lease obligations. Furthermore, the Panel’s opinion did not analyze the issue presented in this appeal, nor did it consider the contrary positions taken by courts considering this issue. Under these circumstances, the rule of stare decisis does not require us to follow the comments in Ransom regarding the older vehicle operating expense, and we decline to do so.”
Making matters worse, there is nothing in the Leudtke opinion which suggests that its holding is limited to Chapter 13 cases. A Chapter 7 Trustee is now likely to object to a debtor’s use of the “older vehicle operating expense”, the result of which may be that some above-median debtors will find themselves unable to file a Chapter 7 case.
This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions related to means testing and allowable expenses in bankruptcy, please call our office at (503) 545-1061 (Oregon cases) or (360) 836-4238 (Washington cases) to schedule a free initial consultation.