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Emory Bankruptcy Developments Journal

Abstract

With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress adopted for the first time a standardized income-based test for measuring an individual debtor’s “disposable income,” which is the amount a debtor must pay to unsecured creditors in a chapter 13 proceeding. Under the means test, debtors calculate their disposable income by deducting from income various standard expenses established by the Internal Revenue Service. One of those standard expenses is a vehicle ownership expense, which debtors can deduct if they have auto loan or lease payments. 

This Article is about bankruptcy courts who deny the car ownership expense to some debtors based on a mere technicality and an incorrect interpretation of the U.S. Supreme Court’s holding in Ransom v. FIA Card Services, N.A.

Imagine that twin brothers file a chapter 13 case. Prior to filing, Ron obtained an auto loan to finance the purchase of a pre-owned vehicle and granted his lender a perfected security interest in that vehicle. Don borrowed the same amount from a car title lender, which obtained a perfected security interest in a vehicle that Don already owned. Don used the loan to pay off medical bills. If Ron is allowed to take a standard deduction of $500 for car ownership expenses, but Don is not, Ron’s disposable income will be much lower than his twin brother’s disposable income. Ron’s lender has a purchase-money security interest (“PMSI”) while Don’s lender has a non-PMSI. However, both Ron and Don must repay the lenders, or else the brothers will lose possession of their vehicles. Both lenders enter the bankruptcy legal system with their rights intact under the Uniform Commercial Code and both experience equality of treatment, one of the fundamental goals of the bankruptcy system. However, only Ron—the debtor with the PMSI auto loan—benefits from a fresh start, the other fundamental goal of the bankruptcy system. Because debtors with PMSI loans as well as non-PMSI loans must repay the loans to keep their vehicles, both groups should be allowed to take the ownership expense deduction, in accordance with the Ransom holding. 

Congress should amend BAPCPA to allow debtors with non-PMSI loans to take the car ownership expense deduction and receive the full fresh start Congress intended for them. Otherwise, such debtors will be required to pay artificially inflated disposable incomes, will most likely struggle to make, and occasionally miss, payments for the duration of their plans—or even worse, be forced to surrender their means of getting to and from work.

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