Originally published January 11, 2011

Keywords: Bankruptcy Code, appellate, projected disposable income, debtor, creditor, Ransom v. FIA Card Services,

Today the Supreme Court issued a decision, described below, of interest to the business community.

  • Chapter 13 Bankruptcy—"Projected Disposable Income"

Chapter 13 Bankruptcy—"Projected Disposable Income"

Ransom v. FIA Card Services, N.A., No. 09-907 (previously discussed in the April 19, 2010 Docket Report)

Chapter 13 of the Bankruptcy Code allows an individual debtor to propose a plan for repaying creditors out of the debtor's "projected disposable income." If a creditor objects, the bankruptcy court may confirm the plan only if it provides for all of the debtor's projected disposable income to go toward paying off debt. 11 U.S.C. § 1325(b)(1)(B). Today, in Ransom v. FIA Card Services, N.A., No. 09-907, the Supreme Court clarified the method for calculating disposable income under Chapter 13, holding that only those categories of expenses that the debtor actually incurs may be subtracted from the debtor's current income, even when the specific amount that would otherwise be subtracted is, as a matter of statute, a standardized rather than individualized amount.

For debtors whose monthly income exceeds the median in their state, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 replaced case-by-case determinations of disposable income with a semi-standardized "means test." The means test calculates disposable income by subtracting "amounts reasonably necessary to be expended" in certain categories from the debtor's current monthly income. For some categories of expenses, the "amounts reasonably necessary to be expended" are defined as the standardized amounts found in certain IRS standards. With respect to those categories of expenses, the means test allows the debtor to subtract from current income the "applicable monthly expense amounts" set forth in the relevant standards. Those standards include, among other things, a standardized automobile "ownership cost" and a standardized automobile "operating cost."

The question in Ransom was whether the means test permits a debtor to subtract the standardized automobile "ownership cost" when the debtor owns the automobile outright, and thus does not make monthly loan or lease payments. The Bankruptcy Court, the Ninth Circuit B.A.P., and the Ninth Circuit all denied confirmation of the proposed plan because it did not commit all disposable income—calculated without an "ownership cost" expense—to debt repayment.

In today's 8-1 decision written by Justice Kagan, her first opinion, the Supreme Court affirmed the lower court decision, ruling in favor of an objecting creditor and holding that the "ownership cost" reduction was not available to a debtor who incurred no such costs.

The Court focused on the phrase "applicable monthly expense amounts," reasoning that categories of expenses are not "applicable" to a debtor who does not incur them. Slip op. 6–7. The Court rejected the debtor's contention that the word "applicable" refers to the process of identifying the appropriate amount in the IRS tables of ownership costs (which set forth different standardized amounts depending on the debtors' location, family size, and other variables), rather than the evaluation of whether the category applies at all to that debtor. Id. at 11. The plain meaning of "applicable" supports the Court's reading, Justice Kagan wrote, as does the ultimate object of the means test, which is to determine the "amounts reasonably necessary to be expended" by the debtor. Id. at 8. The Court also found that the legislative intent of "ensur[ing] that [debtors] repay creditors the maximum they can afford" favored excluding such hypothetical expenses. Id. at 9 (quoting H.R. Rep. 109-31, pt. 1, at 2 (2005)). Having decided that the debtor may apply only those categories in which he incurs actual expenses, the Court then held that the "ownership costs" category encompasses only loan or lease payments; insurance, maintenance expenses, taxes, and other costs are covered by the separate "operating costs" category. Id. at 9–10.

Justice Scalia's lone dissent relied largely on his contrary parsing of the statutory text.

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