Judge Pamela Pepper recently issued a lengthly decision involving a hot topic under BAPCPA -- the issue of the allowability of the Local Standard's vehicle ownership deduction in the calculation of the projected disposable income for an above-median income debtor when the vehicle is paid off. In re Sawdy, ___ B.R. ___, 2007 WL 582535 (Banktcy. E.D. Wis.). The debtors contended that they were allowed to take the vehicle ownership deduction while the Chapter 13 Trustee disagreed. Pursuant to the case of In re Mendenahll, 54 B.R. 44 (W.D.Ark. 1985), the Court held that the Trustee as the objecting party held the burden of persuading the Court that the debtors should not be allowed to deduct the ownership expenses.
The Court noted that two distinct lines of decisions have emerged on the presented issue. The Court noted that several courts have held that a debtor cannot deduct an ownership expense for a vehicle he owns free and clear in both the chapter 13 and 7 contexts. See In re Hardacre, 338 B.R. 718 (N.D.Tex.2006), In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo. 2006), and In re Barraza, 346 B.R. 724 (Bankr.N.D.Tex.2006). The Court also noted that a similar number of courts have come to the opposite conclusion in both the chapter 13 and 7 contexts, deciding that regardless of whether a debtor actually has a note or lease payment, that the debtor may deduct the vehicle ownership expense. See In re Wilson, 356 B.R. 114, (Bankr.S.Del.2006) and In re Hartwick, 352 B.R. 867 (Bankr.D.Minn.2006)The Court went on to "attempt to tease from both groups of decisions the major rationales which support them, and to analyze those rationales to determine if they are persuasive in this case."
The Court first examined the "plain meaning" doctrine, which both lines of cases rely on. The Court noted that if the meaning of the statutes was "plain, clear, and unambiguous, then how could six court have interpreted it one way and five courts have interpreted it in exactly the opposite way?". The Court noted that it was skeptical of the usefulness of the "plain meaning" doctrine as a tool of statutory interpretation in analyzing the statutory language at issue. The Court further noted that two courts found the statutory language to have the same meaning, but for different reasons. What made the language clear to one court was not what made it clear to the other. The Court noted a similar pattern in the cases that reached the opposite conclusion.
The Court also found that the "unfair result" rationale can provide support for either line of decisions.
The Court next examined the "ownership/liability" distinction rationale. That is which debtors are entitled to deduct an "ownership expense?" or in other words "what makes a debtor a vehicle "owner". Does the vehicle actually have to be titled in one's name or can one take a deduction for a car one uses and pays for even though it is not titled in one's name? The Court noted that neither the BAPCPA nor the IRS Local Standards Chart provide any guidance in answering this question.
The "policy" rationale was next examined and the Court also found that policy interests can support either line of decisions.
Next, the Court examined the "applicable vs. actual" rationale. Here the Court reviewed the Fowler decision by the Delaware Court that discussed that the expenses for the categories of expense listed in the National and Local Standards are to be the "applicable" monthly expenses specified while for the Other Necessary Expenses, they were to be the debtor's "actual" expenses. <In re Fowler, 349 B.R. 414 (Bankr.D.Del.2006). The point being that where Congress used the word "actual" it meant for the debtor to deduct only the amount the debtor actually paid, but where Congress used the word "applicable", it meant something other than the "actual" payment the debtor has to make each month. But the Court noted that this begs the question of what Congress mean by the word "applicable?".
The Court noted that the Fowler court concluded as did Chief Judge Wedoff in his article Means Testing in the New World - that by the use of "applicable", Congress meant to allow the above-median debtor to claim the Local Standard expenses as "fixed allowances", whether the debtor made lower-or no-actual payment in those categories. The Court noted that this decision was buttressed for the Fowler court, by the fact that Congress did not import into the involved statute certain language from the referenced Internal Revenue Manual that set the Local Standards as a cap. Judge Pepper stated that this rationale provide compelling support for the debtor's argument that the above-median income debtor is allowed a flat ownership deduction, regardless of whether they have an actual car payment expense or not.
Finally, the Court review the reliance on IRS materials rationale. That is, several of the Courts which did not allow debtors with paid off vehicles the ownership deduction reached their decisions by referencing certain materials promulgated by the IRS. The Court found that it is not appropriate to look to the IRS materials to interpret the word "applicable."
The Court concluded that the debtors are entitled to deduct on their Form B22C the IRS Local Standard expense amount for vehicle ownership even though they own their vehicle outright and do not make monthly note or lease payments. The Court based its decision on the use of the word "applicable" instead of the word "actual" and second that Congress considered, but did not import certain language from the IRS materials.
Tuesday, April 10, 2007
Sunday, April 8, 2007
Kibbe 1st Circuit BAP Decision - Chapter 13 "Projected Disposable Income"
On February 20, 2007, the 1st Circuit BAP issued its decision in the Kibbe case. In re Kibbe, ___ B.R. ___, 2007 WL 512753 (1st Cir. BAP (N.H.)). The issue in the case involved the income component of the "projected disposable income" calculation under section 1325(b)(1)(B).
The Debtor's present income was substantially higher than it was during recent 6 month period prior to filing. This below-median income Debtor sought to calculate the amount required to be paid in her Chapter 13 plan to unsecured creditors based on her Current Monthly Income ("CMI") as per section 1325(b)(2). CMI is based on the historical earnings during the 6 month period prior to filing for bankruptcy per Section 101(10A). The Chapter 13 Trustee objected and argued that the calculation of the projected disposable income should be determined by the Debtor's actual income as set forth in Schedule I and that the income should not be irrevocably set in the calculation of CMI as set forth in Form B22C.
The BAP Court noted that the BAPCPA did not define the term projected disposable income. It also noted that the the CMI is based on historical income while the term projected disposable income is forward-looking. It further noted that "disposable income" as used in section 1325(b)(2) is based on CMI which is not necessarily reflected of the current income of the debtor.
The BAP Court further noted that this apparent inconsistency within the term "projected disposable income" has produced two competing interpretations. One camp construes that "projected" simply means that the CMI figure Form B22C must be multiplied (projected out) by the number of months of the proposed plan. See In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006). The second camp holds that the term "projected" was intended to signal a reexamination of income potential over the life of the plan with the consequence that "disposable income" and "projected disposable income" have very different meanings. See In re Hardacre, 338 B.R. 718 (Bankr.N.D. Tex.2006).
In its discussion, the BAP pointed out that Congress intended to exclude certain categories of income when it defined "disposable income" in general and more specifically in the Chapter 13 context. Not to be included are, inter alia, benefits under the Social Security Act per section 101(10A)(B) and child support, foster care, or disability payments for a dependent child to the extent reasonably necessary to be expended for the child per section 1325(b)(2). The Court stated that these "Income Exclusions" are included in the income calculation set forth in Schedule I and that therefore Schedule I, without modification, is not an accurate measure of the new "disposable income" definition of section 1322(b)(2).
The BAP agreed with the Kibbe Bankruptcy Court that "projected disposable income" must be grounded in the Debtor's anticipated income (less the noted "Income Exclusions"). The Court held that Form B22C must at least be the starting point for the determination of "projected disposable income". If the debtor's CMI is substantially the same as the actual current income (less the "Income Exclusions") at the time of the confirmation of the plan the inquiry begins and ends with Form B22C. But where the CMI amount is not the same as the debtor's actual current income (less the "Income Exclusions"), the courts should assume that Congress intended that they rely on what a debtor can realistically pay to his creditors through their plan and not on any "artificial measure". The Court held that the income component of "projected disposable income" is the anticipated actual income of the Debtor, subject to the "Income Exclusions" during the plan commitment period. Where the debtor's income at confirmation or as reasonably anticipated for the plan commitment period is materially different from the debtor's "disposable income" the court must depart from the Form B22C calculation.
The Court noted that the figures set forth in Schedule I may also not be determinative as they ignore the new statutory definition of the term "disposable income" and also fail to account for reasonably anticipated changes in the debtor's circumstances after the petition date. If the circumstances are that neither Form B22C nor Schedules I (less the "Income Exclusions") and J accurately portray the debtor's income projected over the plan commitment period, the Bankruptcy Court must make a fact-based determination at the time of confirmation.
The Court noted in footnote 11, that the ambiguities, if any, in the calculation of allowable expenses for the above or below-median income debtors were not before the Court.
The Debtor's present income was substantially higher than it was during recent 6 month period prior to filing. This below-median income Debtor sought to calculate the amount required to be paid in her Chapter 13 plan to unsecured creditors based on her Current Monthly Income ("CMI") as per section 1325(b)(2). CMI is based on the historical earnings during the 6 month period prior to filing for bankruptcy per Section 101(10A). The Chapter 13 Trustee objected and argued that the calculation of the projected disposable income should be determined by the Debtor's actual income as set forth in Schedule I and that the income should not be irrevocably set in the calculation of CMI as set forth in Form B22C.
The BAP Court noted that the BAPCPA did not define the term projected disposable income. It also noted that the the CMI is based on historical income while the term projected disposable income is forward-looking. It further noted that "disposable income" as used in section 1325(b)(2) is based on CMI which is not necessarily reflected of the current income of the debtor.
The BAP Court further noted that this apparent inconsistency within the term "projected disposable income" has produced two competing interpretations. One camp construes that "projected" simply means that the CMI figure Form B22C must be multiplied (projected out) by the number of months of the proposed plan. See In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006). The second camp holds that the term "projected" was intended to signal a reexamination of income potential over the life of the plan with the consequence that "disposable income" and "projected disposable income" have very different meanings. See In re Hardacre, 338 B.R. 718 (Bankr.N.D. Tex.2006).
In its discussion, the BAP pointed out that Congress intended to exclude certain categories of income when it defined "disposable income" in general and more specifically in the Chapter 13 context. Not to be included are, inter alia, benefits under the Social Security Act per section 101(10A)(B) and child support, foster care, or disability payments for a dependent child to the extent reasonably necessary to be expended for the child per section 1325(b)(2). The Court stated that these "Income Exclusions" are included in the income calculation set forth in Schedule I and that therefore Schedule I, without modification, is not an accurate measure of the new "disposable income" definition of section 1322(b)(2).
The BAP agreed with the Kibbe Bankruptcy Court that "projected disposable income" must be grounded in the Debtor's anticipated income (less the noted "Income Exclusions"). The Court held that Form B22C must at least be the starting point for the determination of "projected disposable income". If the debtor's CMI is substantially the same as the actual current income (less the "Income Exclusions") at the time of the confirmation of the plan the inquiry begins and ends with Form B22C. But where the CMI amount is not the same as the debtor's actual current income (less the "Income Exclusions"), the courts should assume that Congress intended that they rely on what a debtor can realistically pay to his creditors through their plan and not on any "artificial measure". The Court held that the income component of "projected disposable income" is the anticipated actual income of the Debtor, subject to the "Income Exclusions" during the plan commitment period. Where the debtor's income at confirmation or as reasonably anticipated for the plan commitment period is materially different from the debtor's "disposable income" the court must depart from the Form B22C calculation.
The Court noted that the figures set forth in Schedule I may also not be determinative as they ignore the new statutory definition of the term "disposable income" and also fail to account for reasonably anticipated changes in the debtor's circumstances after the petition date. If the circumstances are that neither Form B22C nor Schedules I (less the "Income Exclusions") and J accurately portray the debtor's income projected over the plan commitment period, the Bankruptcy Court must make a fact-based determination at the time of confirmation.
The Court noted in footnote 11, that the ambiguities, if any, in the calculation of allowable expenses for the above or below-median income debtors were not before the Court.
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