A July, 8, 2011 decision may provide great assistance to over median debtors. In re Johnson ,2011 Bankr. Lexis 2518, Case No. 8:11-bk-00810-MGW.(Bankr. M.D. FL 2011)

The operating expense allowance on the means test for above median income debtors permits the deduction of the allowance for two vehicles. There is no provision to use an operating allowance for three cars. The IRS table for Local Transportation Expenses only provides for this expense for 2 vehicles.

Debtors often have more than two vehicles. Consider husband and wife have two vehicles and both work. They have a minor child who has use of a third car for school and perhaps for extracurricular activities. But the IRS Collection Financial Standards, which were in part relied upon by the Supreme Court this year in Ransom, provide that other reasonable and necessary expenses may be allowed if for the health and welfare of the family or for the production of income. (Note that these collection standards also contain the provision for an additional $200 operating allowance for vehicles that are more than 6 years old or have more than 75,000 miles.)

Over the United States Trustee’s objection, Judge Williamson in the Middle District held that though the operating expense amount is fixed, that the debtor could deduct three operating expense allowances for three vehicles, subject to appropriate proof at an evidentiary hearing.

There is some bad news here. It would be nice for a debtor to be able to claim an expense higher than the authorized operating expense. Insurance costs, gasoline, tolls, and repairs may well exceed these costs. Special circumstances might have to be claimed, but this can be a difficult claim.

Note that the difference between allowing two and three operating expenses could mean the difference between eligibility of chapter 7 and chapter 13. But even if a debtor is in chapter 13, the extra allowance can reduce the required plan payment.

As a bankruptcy attorney in the Southern District of Florida, I would expect (hope) that the Johnson decision would be applied here as well.

As discussed in a previous post, the United States Supreme Court in the Ransom case held that a debtor could not use the car ownership allowance when the debtor did not have a car payment.

However, based on the Internal Revenue Service Collection Financial Standards, a taxpayer can use an additional operating allowance for vehicles older than 6 years old or with more than 75,000 miles. This allowance is $200.00. Though Ransom hedged and said the standards are not incorporated into the bankruptcy code, the Supreme Court observed that the IRS guidelines are persuasive.

As a Broward County bankruptcy attorney representing debtors in the Fort Lauderdale area and surrounding counties, I can tell you that the United States Trustee does not object to claiming additional old car allowance in the means test, nor does the chapter 13 trustee.

A recent case reiterated the applicability of this additional exemption. In re Baker, 2011 Bankr. Lexis 490(Bankr. M. D. Montana Feb. 9, 2011), (citing prior consistent authority).

The additional operating allowance for cars that are older than 6 years or have more than 75,000 miles can mitigate the harm to debtors from the Ransom decision.

As discussed more on my website, the starting point for the means test analysis is determining whether the debtor is above the median income for the state. The median income depends on the household size of the debtor.

The question is how do you determine the household size for the means test? A recent case summarized case law on the three approaches to determining household size. In re Morrison, 2011 Bankr. Lexis 103(Bankr. M.D. N.C. 2011). Several cases had used the “heads on beds” approach, which counts everyone physically residing in the debtor’s premises. A second approach is to only use individuals who could be dependents on a federal tax return. The court concluded that the first approach was too broad and the last approach was too narrow.

The court used the”economic unit” approach. Thus 2 roommates who are just sharing rent are really 2 separate households for means test purposes. But an unmarried couple with joint bank accounts sharing income and expenses would be a household of 2.

Which approach is best for a debtor? This depends on a case by case basis. If we include more members living in the same premises as part of the same household, the median income figure goes up and the allowed expenses also increase. However, then both incomes must be included.

On January 11, 2011, the United States Supreme Court entered its decision on a means test issue that had split courts accross the country. Ransom v FIA Card Services, NA., fka MBNA America Bank. involved the issue of whether the debtor could deduct the applicable IRS allowed budget expense as a car owner whether or not the debtor had a car payment.

When a debtor is over median income, the debtor must complete the expense portion of the means test. Some items are based on IRS guidelines, such as an allowed expense for food, clothing and utilities. Other items are based on actual expense, such as health insurance costs, child care and mortgage payments.

The statutory language was confusing as to car ownership. For example, let’s say the IRS allowance is $480.00 per month. If the debtor’s car payment over the next 5 years was $520.00 per month, the debtor could deduct the full secured debt expense of $520.00 per month. If the car payment was $380.00 per month, it was generally recognized that the debtor could deduct the full $480.00. What if there was no car payment? Was the applicable amount that could be deducted still $480.00 or was it now zero? The Supreme Court held that it was zero.

Keep in mind the anomaly that the court recognized that the debtor might be entitled to the full $480 deduction even if only one payment on the car remained to pay it off in full.

One might think that there is no reason why a debtor should obtain a deduction in the budget if no payments were being made. But keep in mind there is an expense to owning any car, they depreciate in value, have a useful life, and need to be replaced. This is a budget item because realistically savings are needed for the next car. Also, it seems unfair that a person can have a high car payment, and thereby have less available to pay credit cards, while a a more budget conscious person with a free and clear car must pay more to credit cards.

This case creates a dilemma for bankruptcy attorneys. BAPCPA provides that attorneys cannot advise a debtor to incur a debt. Often a debtor has a car owned free and clear and would only become eligible for chapter 7 by obtaining financing on a newer vehicle. Or debtors might be sharing a car to save money, but obtaining a second car would enable them to file chapter 7 or 13. Similarly, if a debtor must file chapter 13, their plan payment to credit cards would be lower with a car payment.

As a Fort Lauderdale bankruptcy attorney, I recognize that I cannot advise clients in violation of the bankruptcy code. But there is no restriction on explaining the bankruptcy law and the consequences of certain actions. South Florida Bankruptcy attorneys will have to adjust their practice as a result of the Ransom decision. In some parts of the country Ransom will not change existing practice, but for Broward bankruptcy attorneys and surrounding areas there will be a substantial impact.