Means test ownership deduction hits pothole

10 Jan Means test ownership deduction hits pothole

The 9th Circuit Bankruptcy Appellate Panel has just decided Ransom, holding that a debtor cannot take an ownership allowance with respect to a car that is lien free.

Like so much of the poorly written BAPCPA, the means test provision for an “ownership allowance” has been subject to contrary court decisions. The issue is whether a debtor whose car is paid for can deduct a sum associated with its “ownership”. There is a separate allowance for the cost of operating a vehicle.

The BAP ruled that the ownership allowance is not available if the car is fully paid for. The judges ruled that the IRS expense allowance is not “applicable” if there is no present debt secured by the car.

Contrast this decision to the reasoning in the Swan case, where Judge Weissbrodt considered the impact on the administration of Chapter 13 cases of motions to modify plans when the car, fully paid for at the commencement of the case, requires replacement. Judge Weissbrodt accepted what most of us know to be true that the cost of car ownership is ever present.

The potential for uneven treatment of debtors is obvious when you consider that a debtor who has one remaining payment of $200 on his car is entitled to deduct the full monthly ownership allowance from his income in figuring the means test. A debtor who made that last payment the month before filing gets no ownership deduction.

Secretly of course, I hope that this decision becomes widely known, and that all my clients borrow from friends or family before they come to see me, and properly perfect the lender’s lien on the vehicle. So much for rationality in this law.

As working bankruptcy lawyers, we thirst for appellate court resolution of the myriad of unanswered questions raised by the 2005 amendments. Just how unsettled the issue still is comes out at the end of the Ransom decision: both lawyers and the three judges on the appeals panel agreed to certify the decision for immediate appeal to the higher appeals court! So, nothing is certain yet.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.

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