One of the most talked about issues in consumer Chapter 7 bankruptcy laws is whether an above median income debtor can deduct a vehicle transportation ownership expense without having a loan or lease payment. The U.S. Trustee's position has always been that the debtor can not deduct this expense unless he or she has a car payment (no matter how big or small). Debtor's attorneys have always argued that you should be allowed a vehicle transportation expense under the means test even if the car is completely paid for. Bankruptcy courts for the most part have been torn on the issue. However, there are now 2 Circuit Courts that agree with the Debtor's attorneys: the 7th U.S. Circuit Court of Appeals in Ross-Tousey v. Neary, 549 F.3d 1148 and now in the 5th U.S. Circuit Court of Appeals in Tate v. Bolen, 19 CBN 769.
In Tate, the debtor was an above median income debtor who owned 2 cars that were paid in full. The debtors filed a Chapter 7 bankruptcy case and claimed a transportation ownership expenses. Without the expense, the debtor's would not pass the means test and thus their case would be an abuse. The Bankruptcy Court ruled in favor of the U.S. Trustee that the debtors could not deduct the expense. The District Court affirmed the decision on appeal. The Fifth Circuit Court of Appeals reversed and remanded.
The Court looked at the only other Circuit Court decision, listed above. The 7th Circuit found that there are courts that rely on the plain meaning of Section 707(b)(2)(A) and those courts that rely on the "IRS Manual" to figure out what is an applicable monthly expense. The 5th Circuit agreed with the 7th Circuit that the IRS Manual should not be followed.
This is good news for debtors and debtors attorneys. Frugal above median income debtors should not be punished for not purchasing cars that they can not afford. Further, Debtor's attorneys should not be put into the situation of telling their client "if only you had a car payment. Maybe you should consider buying a car prior to filing". As most debtor attorneys know, an attorney can not tell their client to incur debt. That could change in the near future with that very issue being presented to the Supreme Court in Milavetz, Gallop & Milavetz, P.A., et al v. United States, No. 08-1119.
Brian Limbocker
Limbocker Law Firm, LLC
2470 Windy Hill Road SE Suite 300
Marietta, GA 30067
Phone: 770-933-5355
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