Ramifications of U.S. Supreme Court’s Ransom Decision for Colorado Bankruptcy Filers

February 4, 2011

By: David M. Serafin

On January 11, 2011, in Ransom v. FIA Card Services, the United States Supreme Court denied chapter 13 bankruptcy filers use of the “ownership expense” deduction under the Means Test for motor vehicles free and clear of any liens (e.g. which are paid off). Within the context of a chapter 13 in Colorado, the Means Test determines the minimum monthly disposable income to be paid back to unsecured creditors.

Traditionally, the Means Test (used by debtors either to determine whether disposable income is low enough to qualify for chapter 7 or, if chapter 13 bankruptcy is necessary, how much unsecured creditors are entitled to in the form of plan payments) has allowed for a deduction for both operating expenses AND ownership expenses – much of the calculation derives from not only actual costs but also county and state of residence. But now, the 8-1 Supreme Court decision allows for debtors to deduct only operating expenses, but not ownership expenses, for a vehicle owned free and clear.

Before this decision, filers in Colorado could deduct an additional $496 per month from their gross income on the Means Test. Now, this $496 per month (or $992 per month for joint filers) will need to be paid to unsecured creditors, such as credit card companies, pay day loans and for medical bills.

Initially, it would seem to make sense that chapter 13 debtors should not be allowed an additional Means Test deduction for a vehicle not encumbered by a monthly payment.

However, the Ransom decision particularly hurts chapter 13 bankruptcy debtors (particularly those in a 5 year payment plan – which includes most filers) who need to purchase a new car before the expiration of such plan. Most filers with a paid off vehicle will be looking for a new vehicle within the next 5 years because that same vehicle is typically older. Now, when the bankruptcy debtor needs to replace his/her vehicle, any funds normally left over will instead go toward funding the chapter 13 plan. Any extra funds which would normally be left over will now be fully paid into the chapter 13 plan, thereby leaving no provision for emergencies and, hence, room for error in the plan.

In my opinion, the Ransom decision also encourages chapter 13 debtors in Colorado to incur additional debt prior to filing for bankruptcy in order to utilize the “ownership expense” deduction under the Means Test, which directly contradicts the Bankruptcy Code’s long standing policy of rewarding debtors who minimize their debt. Put another way, why should the Bankruptcy Code favor filers with higher car payments over those trying keep an older car on its last legs?

Further, although not expressly addressed in Ransom, the disallowance of the Ownership expense deduction also affects chapter 7 filers in Colorado and nationwide in that a debtor with a paid off vehicle (or joint debtors with two paid off vehicles) will fair the Means Test and be pushed into chapter 13.