Friday, January 21, 2011
Anti-Consumer Supreme Court Issues Opinion Favoring Credit Card Companies
Justice Elena Kagan delivered her first Supreme Court opinion on Tuesday, January 11, 2011. The Court agreed with her 8 – 1, with only Justice Antonin Scalia dissenting. Unfortunately, Judge Kagan's decision was a big win for creditors and a disappointing loss for consumers.
The case, Ransom v. FIA Card Services, concerns the treatment of automobile expenses in bankruptcy and is a widely contested issue between bankruptcy trustees, debtors, and creditors. To add to the disappointing ruling, Justice Kagan's decision overturns the majority opinion of bankruptcy judges in the Middle District of Florida, Tampa Division.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was enacted by Congress to correct perceived abuses of the bankruptcy system. The main focus of the Court's decision centered on the "means test" which is a test designed to ensure that debtors who are able to pay their creditors actually do so. In the context of a Chapter 13 case, the means test provides a mechanical formula to calculate the debtor's disposable income. The debtor's disposable income is then used to calculate the amount of money the debtor must repay to his creditors over the 36- to 60-month life of the bankruptcy plan. The language at issue in this case is:
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 debtor resides. §707(b)(2)(A)(ii)(I) (emphasis added).
The "National and Local Standards" refers to IRS tables listing standardized expense amounts for basic necessities – in this case automobile expenses which the IRS breaks into "Operating Costs" and "Ownership Costs." The IRS defines "Operating Costs" as things like oil changes, car maintenance, fuel, etc., and "Ownership Costs" as monthly loan or lease payments. These costs are deducted from the debtor's gross monthly income (along with other expenses irrelevant to the analysis of this case) to determine the debtor's monthly payment to creditors.
Mr. Ransom filed Chapter 13 bankruptcy and deducted the allowed "Operating Costs" and "Ownership Costs" of his free and clear cars. FIA Card services objected claiming that "Ownership Costs" should be disallowed because the debtor makes no car payments, and with these costs disallowed more money would be available to all unsecured creditors during the life of the bankruptcy plan.
Justice Kagan and the Court did an extensive statutory analysis on the language of the Bankruptcy Code focusing on the word "applicable" in the statute. Ultimately, the Court decided that the word "applicable" referred to the availability of the deduction and held the deduction unavailable since the debtors made no car payments. Justice Scalia dissented giving no weight to the word "applicable" and instead giving it construction in terms of "where to look in the appropriate table." Justice Scalia would have had the Court rule in favor of the debtor, thus allowing him to have a higher deduction to income and paying less to his unsecured creditors over the length of the plan.
Unfortunately for debtors, the majority opinion controls so that someone who owns a car free and clear has no entitlement to these deductions, and therefore would have to pay more to unsecured creditors in a Chapter 13 plan. This may cause some debtors to go borrow against their free and clear automobiles prior to filing so that they are entitled to the deduction. However BAPCPA prevents attorneys from counseling clients to obtain more debt in order to file bankruptcy. Moreover the cash obtained from the refinance of the car would belong to the bankruptcy estate and used to pay back creditors. It is certainly a bad sign for consumers that the Supreme Court has taken an anti-consumer stance in Justice Kagan's first opinion, and during a time in our Country's economy where consumers need every break we can get. Certainly, more planning is necessary for borrowers considering filing bankruptcy if they own a car free and clear.