Earlier this 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, Chapter 13 bankruptcy can substantially reduce monthly payments for both secured and unsecured debt. Unlike Chapter 7 bankruptcy where debt is discharged, Chapter 13 bankruptcy means that you fully intend to repay the debts owed. How is this accomplished? By arranging a repayment plan that will be reviewed, approved and managed by the bankruptcy court.

The monthly amount you pay under a repayment plan, known as "disposable income," will be divided among your various unsecured creditors. It is calculated through a means test.

Simply put, the means test takes your current monthly income and subtracts (i.e., deducts) necessary living expenses (food, clothing, transportation, court ordered payments, etc.). The amount remaining after making all of the permissible deductions is your disposable income or your monthly payment under the Chapter 13 repayment plan.

In Ransom v. FIA Card Services, Jason Ransom filed for Chapter 13 bankruptcy in the U.S. Bankruptcy Court for the District of Nevada in July 2006 after amassing considerable debt. In calculating his disposable income, he elected to deduct $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.

Here, the bankruptcy court overruled the objection and allowed Ransom to make the deduction. FIA Card Services later filed an appeal with the Bankruptcy Appellate Panel for the 9th Circuit, but the decision of the bankruptcy court was affirmed.

FIA Card eventually filed yet another appeal with the 9th U.S. Circuit Court of Appeals, where the initial decision of the bankruptcy court was overruled. Subsequent to this action, Ransom sought review by the United States Supreme Court.

To be continued ...

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)