Bankruptcy in Arizona, as in all states, is subject to a complex set of federal statutes as well as specific state laws that govern bankruptcy exemptions and other issues. Many people who are interested in bankruptcy as a debt relief option are aware that significant changes to the U.S. Bankruptcy Code took effect when Congress passed and President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005.
One important part of these changes was the introduction of a “means test” to determine eligibility for Chapter 7 bankruptcy and compute the amount of disposable income a Chapter 13 debtor has available for reimbursement of creditors. Earlier this year, the U.S. Supreme Court interpreted the section of the bankruptcy code that defines the expenses that a debtor can deduct when carrying out a Chapter 13 or Chapter 7 means test.
The bankruptcy code defines an individual or couple’s monthly expenses using national and local standards for basic necessities, as well as Internal Revenue Service (IRS) expense tables for federal income tax purposes in the debtor’s area of legal residence. In addition to housing, food and transportation costs, specifically defined expenses include “reasonably necessary health insurance, disability insurance, and health savings account expenses” for the debtor and his or her spouse and dependents. Monthly expenses of the bankruptcy applicant do not include any payments for debts.
Judicial Resolution of Complex Bankruptcy Disputes
The recent Supreme Court case, Ransom v. F.I.A. Card Services, involved a Chapter 13 petitioner who had named FIA as an unsecured creditor. In compiling information for his bankruptcy petition, he listed among his assets a car that he owned outright with no car loan or lease payments. To determine his allowable expenses, he specified a car-ownership deduction at the allowed maximum as well as a separate deduction for the costs of car operation and maintenance.
FIA objected to the inclusion of the car ownership deduction, which would have reduced his disposable income over the duration of the 60-month bankruptcy repayment plan by $28,000. The U.S. Bankruptcy Court for the District of Nevada agreed, and its judgment was affirmed by the Bankruptcy Appellate Panel and the U.S. Circuit Court of Appeals for the Ninth Circuit.
The Supreme Court agreed to review the case, and focused its analysis on section 707(b) of the Bankruptcy Code, which provides that a debtor is not allowed to claim all monthly expenses, but only “applicable” expenses. The Court defined applicable to mean “appropriate, relevant, suitable or fit,” and in the bankruptcy context the Court concluded that this meant that a debtor must have actual costs related to the category of deduction.
A nearly unanimous Supreme Court held that the category of car-ownership deductions “encompasses the costs of a car loan or lease and nothing more,” and concluded that the petitioner could not claim the deduction because he had no lease or financing payments. The lone dissenter, Justice Antonin Scalia, took the side of the bankruptcy petitioner, a position that had also been followed by three other U.S. Courts of Appeal. Justice Scalia noted that the majority’s interpretation of applicable “produces a situation in which a debtor who owes only a single remaining payment on his car gets the full allowance.”
Arizona Bankruptcy Attorneys Help Clients Get a Handle on Financial Complexities
The common characteristic of all meaningful long-term debt relief strategies is that they require a thorough look at the hard numbers behind a couple or individual’s financial situation. A debt relief lawyer can help a client understand the pros and cons of every option, including the significance of deductibility of expenses for Chapter 7 and Chapter 13 means tests.
The Supreme Court’s recent decision regarding vehicle-ownership expenses could have significant implications for a client who considers pursuing a Chapter 7 or Chapter 13 bankruptcy. A Phoenix bankruptcy lawyer can explain precisely why this may be so under a client’s unique circumstances. For those who fail to qualify for Chapter 7 liquidation, a clear understanding of the latest legal developments can provide a clearer assessment of the advantages of a Chapter 13 reorganization, including the effect on mortgage foreclosure and a host of other debt-related issues.