Jason N. Litton and Jennifer H. Litton
SO ORDERED.
DONE and SIGNED September 18, 2023.
JOHN S. HODGE
UNITED STATES BANKRUPTCY JUDGE
Memorandum Ruling
The chapter 13 trustee objects to the plan because it does not pay all of Debtors’ disposable income to creditors. The trustee challenges the calculation of Debtors’ disposable income.
When calculating disposable income, the Bankruptcy Code permits an above-median debtor to deduct amounts specified in tables prepared by the Internal Revenue Service which list standardized expense amounts for various categories of necessities. At issue in this case is the category for Transportation “Ownership Costs” which encompasses the costs of a vehicle loan or lease.
Prior to the petition date, Debtors used their lien-free vehicle as collateral to secure a loan to obtain cash. The trustee argues that it is improper for Debtors to claim a deduction using the amount specified in the Ownership Costs category because the loan proceeds did not enable them to acquire rights in the vehicle. According to the trustee, payments on a nonpurchase-money
The court agrees with the trustee. The objection is sustained.
Background
The facts are not in dispute. On February 28, 2023, Jason N. Litton and Jennifer H. Litton (collectively “Debtors“) filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code. The only asset at issue is their 2006 Ford F-150 valued at $5,000.00 and encumbered by a lien securing a nonpurchase-money loan.
Debtors acquired the truck nine years before filing a bankruptcy petition. They borrowed money to acquire it and later paid off the loan. Approximately thirteen months prior to the petition date, Debtors borrowed $4,621.50 from their credit union and granted a security interest in their truck to secure the loan. Debtors executed a loan agreement promising to pay the principal together with interest accruing at 9.25% per annum until paid in full. The loan agreement requires 75 biweekly payments. The credit union holds a properly perfected nonpossessory, nonpurchase-money security interest in the truck. On the petition date, Debtors owed their credit union $3,750.00 for the loan.
Debtors earn an income that is above the median for their State. As such, they are required to use Official Form 122C-2 to calculate their monthly disposable income. The calculations on this form—sometimes called the “means test“—reduce a debtor‘s income by living expenses and payment of certain debts, resulting in the amount available to pay unsecured debts.
When performing the means test, Debtors claimed three deductions related to their vehicle: 1) the average monthly payment owed to the credit union for the debt secured by their vehicle; 2) the standardized monthly amount allowed by the IRS for “Operating Costs” of a vehicle; and 3) the standardized monthly amount allowed by the IRS for “Ownership Costs” of a vehicle. No party challenges the deductions for the monthly debt payments or for operating expenses. The trustee, however, challenges the deduction for ownership expenses.
The trustee objects to the plan on the ground that it fails to pay all of Debtors’ disposable income to unsecured creditors. According to the trustee, the plan shortchanges creditors by $534.801 each month or $32,088.00 over the life of the 60-month plan.
Jurisdiction
This court has jurisdiction pursuant to
Conclusions of Law and Analysis
In a chapter 13 bankruptcy, a debtor must file a plan providing for future payment of his creditors.
The Bankruptcy Code does not provide a definition of projected disposable income. Hamilton v. Lanning, 560 U.S. 505, 509 (2010). Disposable income, however, is defined in the Code to mean “current monthly income received by the debtor ... less amounts reasonably necessary to be expended.”
The Code identifies which expenses qualify as “amounts reasonably necessary to be expended.” As relevant here, the Code provides that:
The debtor‘s monthly expenses shall be the debtor‘s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor‘s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides, as in effect on the date of the order for relief, for the debtor ....
The key word in this provision is “applicable.” Under the statute, a debtor may claim only “applicable” expense amounts listed in the National and Local IRS Standards. The National and Local Standards are “tables that the IRS prepares listing standardized expense amounts for basic necessities.” Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 66 (2011). The Local Standards include an allowance for transportation expenses, divided into vehicle “Ownership Costs” and “Operating Costs.” The issue in this case is whether the amounts listed under the Ownership Costs category are “applicable” to Debtors. No one challenges Debtors’ deduction for the amounts specified under the Operating Costs category.
In Ransom, the Supreme Court examined issues related to the Ownership Costs category. In that case, the debtor owned a car free and clear of liens. In performing the means test, Ransom claimed a deduction for vehicle ownership expenses. He argued that the vehicle ownership category in the IRS table was applicable to him because he owned a car. A creditor objected. The Court determined that an expense amount from the IRS table is “applicable” if it corresponds to a debtor‘s financial circumstances. Congress established a filter, permitting a debtor to claim a deduction from the IRS table only if that deduction is appropriate for him. And a deduction is so appropriate only if the debtor “has costs corresponding to the category covered by the table” and will “incur that kind of expense during the life of the plan.” 562 U.S. at 70. The Court then determined that the vehicle “ownership category encompasses the costs of a car loan or lease and nothing more.” Id. at 71. Because Ransom did not incur a loan or lease payment, the vehicle ownership category in the IRS tables was not applicable to him.
Applying Ransom‘s principles to this case, there are two central questions. First, what expenses are covered by the Ownership Costs category in the IRS table? Second, will Debtors incur “costs corresponding to the category covered by the table” during the life of their plan? Ransom, 562 U.S. at 70. A debtor can only claim an allowance under the IRS tables if he will incur the type of expenses listed in a category covered by the table.
Relying on the IRS guidelines, the Supreme Court concluded that “the numerical amounts listed in the ‘Ownership Costs’ table are ‘base[d] on the five-year average of new and used car financing data compiled by the Federal Reserve Board.‘” Ransom, 562 U.S. at 71 (citing Resp. Br. App. 3a) (alteration in original).3 “In other words, the [amount specified] is the average monthly payment for loans and leases nationwide...” Id. at 72. The Supreme Court reached this conclusion based on its review of the 2006 version of the Collection Financial Standards. Copies of the Collection Financial Standards from 2006 through 2023 are in the record of this case at docket no. 27. Each version contains a “Recent Revisions” heading. The revisions do not indicate that the IRS made any changes to its methodology for determining the amounts for Ownership Costs. Accordingly, this court concludes that the amounts listed in the current Ownership Costs table are based on the five-year average of new and used car financing data.
According to the trustee, “financing” a car implies providing the money for its acquisition. He argues that Ownership Costs represent the average monthly payment for acquisition loans nationwide, not equity loans where a vehicle is used as collateral to secure a loan to obtain cash which can be used for any purpose, including a purpose that is not reasonably necessary. In support, he cites the Collection Financial Standards which state that the Ownership Costs category
represents “nationwide figures for monthly loan or lease payments” and provides the “maximum allowances for the lease or purchase of up to two automobiles if allowed as a necessary expense.” Collection Financial Standards, https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards (emphasis added).
To prepare the releases, the Federal Reserve compiles data from various sources.4 As relevant here, the data expressly exclude, or separately classify, loans made to consumers for nonpurchase-money obligations. For example, the G.19 release includes data contained in Form FR 2644. The form‘s instructions require
separate disclosure of loans “extended for the purpose of purchasing new and used passenger cars and other vehicles” excluding “consumer loans secured by automobiles already paid for.”5 The G.19 release also includes data from a mandatory report, FFIEC 031, filed by every domestic depository institution which requires separate disclosure of “all consumer loans extended for the purpose of purchasing new and used passenger cars and other vehicles,” excluding “consumer loans where the purchase of an automobile is not the primary purpose of the loan.”6 Similarly, the G.20 release includes data from finance companies using Form FR 2248. That form‘s instructions require disclosure of “Consumer Motor Vehicle Loans” “arising from the retail sales of vehicles” excluding “personal cash loans secured by automobiles already paid for.”7 See also “Automobile Loans to Individuals for Household, Family, and Other Personal Expenditures (i.e. Consumer Loans),” Federal Reserve Micro Data Reference Manual, Data Dictionary Item Number K137 (listing multiple reporting forms used by the Federal Reserve for its compilation of statistical data for automobile loans and stating that banks are instructed to “exclude from automobile loans any personal cash loans secured by automobiles already paid for and consumer loans where some of the proceeds are used to purchase an automobile and the remainder of the proceeds are used for
other purposes.“).8
Debtors counter by arguing that this court should refrain from considering the Collections Financial Standards because the Standards were created by the IRS to help determine a taxpayer‘s ability to pay a delinquent tax liability, not to interpret
The Code incorporates the “National Standards and Local Standards” issued by the IRS, and it allows a debtor to deduct his “applicable monthly expense amounts specified under” those Standards.
The Supreme Court made clear that the IRS guidelines “cannot control if they are at odds with the statutory language.” Id. at 72 (emphasis added). Here, the guidelines are not at odds with the statute. Instead, the IRS‘s authoritative explanation of its Local Standards assists the court in properly applying those Standards. The court can and does give weight to those explanations without improperly disregarding the text of the Bankruptcy Code. The statements by the IRS about its Ownership Costs category are relevant to the proper interpretation of the pertinent statutory language. Those statements establish that the “expense amounts specified under the” vehicle ownership Local Standard are not “applicable” to Debtors’ circumstance because those expense amounts pertain to a category of costs that they do not incur.
Debtors’ strongest argument is that the calculation of their monthly disposable income is entitled to a presumption of correctness because they followed all instructions for the Official Form used for the means test. That form makes no mention of a purchase-money loan. Instead, it instructs: “Using the IRS Local Standards, calculate the ownership or lease expense for each vehicle below. You may not claim the expense if you do not make any loan or lease payments on the vehicle.” Official Form 122C-2, Line 13. As Debtors see it, Line 13 applies to them because they “make loan or lease payments on the vehicle.” Debtors argue that they did what the form instructs by inserting the standardized amount from the tables.
That argument is not without force because an above-median debtor is required to use Official Form 122C-2 to calculate his monthly disposable income.
Although courts are divided on the issue of whether a debtor may deduct the amounts specified under the Ownership Costs category when he owns a vehicle encumbered solely by a nonpurchase-money security interest, the majority view is that the deduction is improper. See In re Traylor, 595 B.R. 419, 425 (Bankr. D. Utah 2019) (“[N]on-purchase money loans, such as title loans, are not an applicable monthly expense specified under the IRS Local Standards.“); Feagan v. Townson, 572 B.R. 785, 789 (N.D. Ga. 2016) (“[P]ayments on account of nonpurchase-money security interests do not fall within the category of Ownership Costs.“); In re King,497 B.R. 161, 164 (Bankr. N.D. Ga. 2013) (“Since the Ownership expense figure is based on only financing data and not the entire panoply of automobile loans, this IRM instruction, which the Supreme Court identified with approval, appears to indicate that the ownership expense likewise only applies to the costs associated with an automobile‘s acquisition.“); In re Alexander, No. 12-40408-JWV13, 2012 WL 3156760, at *3 (Bankr. W.D. Mo. Aug. 1, 2012) (“In sum, the Court holds that the vehicle ownership expense established by the I.R.S. and incorporated into the means test (§ 707(b)(2)) and, by extension, the calculation of disposable income under § 1325(b), refers solely to expenses related to the purchase or lease of a vehicle.“); In re Sires, 511 B.R. 719, 725 (Bankr. S.D. Ga. 2014) (“[O]wnership cost not associated with the purchase or lease of a vehicle are not appropriate ownership deductions on line 28 of the means test.“).
Conclusion
The expense amounts listed in the Ownership Costs category are applicable to a debtor only if he incurs monthly expenses associated with acquiring use of the vehicle, either through a lease or a purchase-money loan. Here, Debtors do not have a lease or a purchase-money loan and therefore do not incur a qualifying expense to properly claim the deduction. As the Supreme Court noted, “a debtor should be required to qualify for a deduction by actually incurring an expense in the relevant category. If a debtor will not have a particular kind of expense during his plan, an allowance to cover that cost is not ‘reasonably necessary’ within the meaning of the statute.” Ransom, 562 U.S. at 70-71.
The trustee‘s objection to the plan is sustained. The plan cannot be confirmed. The court will enter a separate order in accordance with this ruling.
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