By Ryan C. Wood
The issue we have here is when the debtor or bankruptcy filer is making the monthly loan or lease payment and paying for maintenance of a vehicle that they are not the purchaser of or person leasing the vehicle. The bankruptcy filer has an agreement with the person that purchased or leased the vehicle to make the payment each month so they can have a car. The bankruptcy filer is the person using the vehicle, making the monthly payment and maintaining the vehicle so they can live. This is not uncommon. Some nice friend or family member purchases a vehicle for the debtor or bankruptcy filer so the person can get a better deal on the vehicle or just too actually qualify to purchase the vehicle at all. This is a good thing and a benefit to society. Everyone needs reliable transportation for the most part to get around and just live a normal life. So, under these circumstances, can an ownership expense for a car not owned or leased by the debtor be deducted in the chapter 7 means test?
According to a recent Ninth Circuit Bankruptcy Appellate Panel decision, BAP No. CC-15-1441-KuFD, In re Desiree H. Drury, yes. The 9th Circuit BAP held when a debtor does not own or lease an automobile but makes monthly lease or loan payments as a prerequisite to his or her continued possession and use of a vehicle, the debtor may claim an expense allowance under the means test for car “ownership” in addition to the “operating” expense deduction. See IRS Local Transportation Expense: Standards – West Census Region – for Cases Filed Between April 1, 2015 and May 14, 2015, Inclusive, as reported in, U.S. Trustee’s website, https://www.justice.gov/ust/means-testing/means-testing-cases-filed-between-april-1-2015-and-may 14-2015-inclusive (last visited Aug. 16, 2016).
Facts of the Drury Petition for Relief Under Chapter 7
For some context this bankruptcy filer had filed a number of bankruptcy cases that were dismissed for some reason prior to this chapter 7 bankruptcy petition filing. It is unclear whether she had the assistance of a bankruptcy attorney or not. This case was filed in May 2015. Unfortunately the petition and the Means Test or Official Form 22A contained some discrepancies regarding Ms. Drury’s income and expenses. Let me be frank, the case is a problem case and it is understandable that the United States Trustee’s office filed a motion to dismiss the case. Ms. Drury represented in her petition that she owned a 2008 Toyota Camry and the Camry was property of the bankruptcy estate. It was later determined that Ms. Drury was not on title or the loan for the Camry. Ms. Drury’s schedules provided she paid for the monthly loan payment and monthly maintenance for the Camry though. Therefore, in the Chapter 7 Means Test (Official Form 22A) Ms. Drury included a deduction for “ownership expense” and “operating expense.” The ownership expense was $517 and the operating expense was $400. The United States Trustee’s office contested the deduction of these expenses arguing Ms. Drury was only entitled to a $295 vehicle operating expense because Ms. Drury did not own the Camry. The UST filed a motion to dismiss Ms. Drury’s case alleging it as presumptively abusive pursuant to Section 707(b)(2) and Section 707(b)(3)(B) as abusive under the totality of Drury’s financial circumstances. The United States Trustee argued that Ms. Drury, without any legal obligation, could stop making the car payments at any time she wants, so the amount of her car payments could be made available to pay back her creditors. The Ninth Circuit Bankruptcy Appellate Panel disagreed and I do too.
The 9th Circuit Bankruptcy Appellate Panel focused on the fundamental point of the Chapter 7 Means Test. On page 14 of the Drury decision the 9th Cir. BAP provides, “Further, when one considers the means test as a whole and its underlying purpose – to assure that debtors pay what they can to their creditors – it makes no sense to focus on the absence or presence of a legally enforceable debt.” Further, on page 15, lines 7-9: “In order to claim this transportation expense, the key determinant is whether the debtor makes a car lease payment or a car loan payment.” I agree with this statement, but also believe and would argue, regardless, there is the presence of a legally enforceable debt. There is a debt owed to the person who purchased or leased the vehicle and is listed as the loan holder and on title to the vehicle. Either way the result is the same though. The bottom line is having a vehicle that is reliable is a necessity of life and should be a deduction in the Chapter 7 Means Test. Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 70 (2011) (“Congress intended the means test to approximate the debtor’s reasonable expenditures on essential items.”)
How To List A Vehicle Under These Circumstances In The Chapter 7 Petition
More or less the bankruptcy filer has an agreement with the actual person on title and the loan to pay the monthly loan payment. That agreement is enforceable. So if the bankruptcy filer stops making the vehicle loan payment the car will be repossessed and sold at auction. There are a few different ways to list a vehicle under these circumstances in the petition schedules. The vehicle should be listed in Schedule B as an asset and property of the bankruptcy estate. If there is equity in the vehicle it should be exempted if possible. I prefer to list the actual lienholder, the loan company, in Schedule D and list the person who is the lienholder as an additional noticed person. I then exclude the lienholder, the loan company, from getting notice of the bankruptcy filing but not the person who is on the loan and title. A bankruptcy attorney friend of mine chooses to list the actual lienholder, the individual, in Schedule D as the secured debt holder and not the loan company at all. Either way the point is to make sure the “ownership expense” is part of the Chapter 7 Means Test and the best way to do that is listing the debt in Schedule D as a secured debt.
Conclusion
Ultimately the Ninth Circuit Bankruptcy Appellate Panel found the Bankruptcy Court abused its discretion for dismissing the case as presumptively abusive under Section 707(b)(2) of the Bankruptcy Code. Under § 707(b)(3)(A), a chapter 7 case may be dismissed as abusive if the debtor filed his or her chapter 7 petition in bad faith. Under § 707(b)(3)(B), a chapter 7 case may be dismissed as abusive under the totality of the debtor’s financial circumstances. The 9th Cir. BAP vacated the dismissal order and remanded the case back to the Bankruptcy Court for further proceedings regarding the dismissal for bad faith and the totality of the debtor’s financial circumstances.
