Last week, Elena Kagan presented her first opinion as a United States Supreme Court Justice in Ransom v. FIA Card Services. The topic? Somewhat surprisingly, it examined Chapter 13 bankruptcy. Specifically, whether a debtor who owns an automobile outright - meaning no outstanding debt obligations - can still claim a deduction for "ownership costs" when determining his or her disposable income.

To review the facts of the case, Jason Ransom filed for Chapter 13 bankruptcy in the U.S. Bankruptcy Court for the District of Nevada after amassing considerable debt. In calculating his disposable income, he deducted $471 from his current monthly income for "vehicle ownership costs" stemming from his 2006 Toyota that he owned outright.

After submitting his proposed repayment plan to the bankruptcy court, FIA Card Services, one of his unsecured creditors, objected to his inclusion of the "vehicle ownership costs" deduction, arguing that it improperly reduced his disposable income.

The bankruptcy court subsequently overruled the objection and allowed Ransom to make the deduction. However, after a sequence of subsequent appeals, the 9th U.S. Circuit Court of Appeals disallowed the deduction. Ransom then sought review by the United States Supreme Court.

Please see "SCOTUS Explores Vehicle Ownership Deductions in Ransom v. FIA Card Services" for more in-depth information.

Post continued ...

The Supreme Court ultimately affirmed the decision of the 9th U.S. Circuit Court of Appeals and ruled that Ransom could not take the deduction for "vehicle ownership costs."

How did Justice Kagan arrive at this decision?

In her opinion, she took a closer look at United States Bankruptcy Code Section 707(b)(2)(A)(ii) which permits deductions for "applicable monthly expense amounts specified under the national standards and local standards ... issued by the Internal Revenue Service."

Somewhat surprisingly, the Bankruptcy Code does not elaborate on what constitutes the permissible deduction for "vehicle ownership costs." However, an answer is provided by the Internal Revenue Manual, which defines "vehicle ownership costs" as either loan or lease payments.

Based on this definition, Justice Kagan found that because Ransom owned his automobile subject to no loan or lease payments, the deduction for "vehicle ownership costs" was not "applicable" to him (i.e., he could not take the deduction when calculating his disposable income).

"Because debtor Jason Ransom owns his car free and clear of any encumbrance, he incurred no expense," wrote Justice Kagan. "Accordingly, the car-ownership expense amount is not 'applicable' to him."

Ransom presented the argument that the term "applicable" was meant to direct debtors to the proper boxes in the national or local standards table on the forms to be filled out, not limit the deductions available to debtors.

Justice Kagan refuted this argument by stating that debtors could find the proper boxes in the national or local standards table without the term "applicable." In addition, she held that Ransom's argument would "sever the connection between the 'means test' and the statutory provision it is meant to implement - the authorization of an allowance for (but only for) 'reasonably necessary' expenses."

The final decision in Ransom v. FIA Card Services was 8-1 (only Justice Scalia dissented).

If you would like to learn more about Chapter 7 bankruptcy or Chapter 13 bankruptcy, take the time to speak with an experienced legal or financial professional.

The following post is for informational purposes only and is not to be construed as legal advice.

Stay tuned for more from our Phoenix bankruptcy blog ...

Related Resources:

No Car Payments Means No Ownership-Cost Deduction, Supreme Court Rules  (Westlaw News & Insight)