Supreme Court Decision Harms Debtors: Ransom v Fia Card Services

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.

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