The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") was enacted by Congress in 2005 to address certain perceived abuses of the bankruptcy system. The Act adopts a “means test,” which provides a formula to calculate a debtor’s disposable income that must be used to pay creditors. Disposable income is defined as monthly income minus “reasonably necessary” expenses in specified categories. For debtors whose income is above the state median, the “means test” identifies the “reasonably necessary” expenses. A debtor calculating “reasonably necessary” expenses must claim allowances for expenses defined in the Internal Revenue Service (“IRS”) National Standards and Local Standards, which specify standardized expense amounts for basic necessities.
Jason Ransom’s liabilities included approximately $82,500 in unsecured debt, a portion of which was claimed by FIA Card Services (formerly known as MBNA America Bank). Ransom was an above-median-income debtor who filed for Chapter 13 bankruptcy relief in 2006. In proposing his bankruptcy payment plan, Ransom calculated his monthly expenses to include a vehicle-ownership deduction, together with a separate vehicle-operating costs deduction for a Toyota Camry, which he owned free of debt. FIA Card Services objected to the plan, arguing that it did not include all of Ransom’s disposable income and that the vehicle-ownership deduction should not have been claimed. The Bankruptcy Court agreed with FIA, holding that a vehicle-ownership deduction could only be applied if the owner was making loan or lease-related payments. The Ninth Circuit Bankruptcy Appellate Panel affirmed. On appeal, the Ninth Circuit Court of Appeals also affirmed this interpretation of the “means test,” as applied to vehicle-related expenses. The Fifth, Seventh, and Eighth Circuits, however, have held that an above-median debtor may claim vehicle-ownership deductions for cars owned free of debt. The Supreme Court granted a writ of certiorari to resolve a split among U.S. courts of appeal and bankruptcy courts regarding the applicability of vehicle-ownership deductions to owners that do not make lease or loan payments.
In Ransom v. FIA Card Services (09-907), an 8-1 majority held that a debtor who owns a car free of debt payment obligations cannot claim vehicle-ownership deductions. Justice Kagan delivered the majority opinion, arguing that the statute’s language specifies only “applicable” monthly expenses as claimable in reducing the bankrupt individual’s income payable to creditors. She reasoned that “applicable” expenses are those corresponding to an individual debtor’s actual financial circumstances, and that a debtor should be actually incurring an expense in the relevant category. Justice Kagan also argued that the Court’s interpretation of the statute best achieves BAPCPA’s statutory objectives by ensuring that debtors pay to creditors the maximum amount they can afford. The Court concluded that “applicable” expenses in the vehicle-ownership category only include loan and lease payments, while other costs associated with owning a car may be included in the separate deduction for operating expenses. Acknowledging that application of this interpretation may produce odd results in certain cases (e.g. someone with only one payment left at the time of filing a bankruptcy plan will get the vehicle-ownership deduction), the Court determined that Congress, in enacting BAPCPA, “chose to tolerate the occasional peculiarities that a brighter-line test produces,” preferring this to inconsistent case-by-case outcomes. Justice Scalia, the sole dissenter, disagreed with the majority’s interpretation of the statute, particularly its reliance on the IRS explanatory guidelines for applying the National Standards and Local Standards. He argued that the word “applicable” should be read as corresponding to the amounts specified in the National Standards and Local Standards for either one or two cars, whichever of those categories is applicable.