United States Bankruptcy Court

Middle District of Florida

Tampa Division


In re:


Cynthia Ann George,                Case No. 8:06-bk-04607-KRM


   Debtor.                        Chapter 13





1.  National vs Local Standards

            The US Trustee has alleged that the Court should examine the Internal Revenue Manual’s instructions for allowance of car ownership allowance.  The Internal Revenue Manual divides allowable expenses into expenses allowed under the National Standards, Local Standards, and other expenses.  IRM  at ¶¶ 1, 2, & 5.  For those expenses allowed under the National Standards, the debtor is allowed the full deduction regardless of actual expenses paid.  IRM at ¶ 2.  The Transportation expenses objected to is allowed under the Local Standards.  Under the Local Standards, the taxpayer is allowed the local standard or the amount actually paid, whichever is less.” IRM at ¶ 4.  This must be distinguished from the §707(b)(2)(A), where the deduction is allowed in full regardless of the actual amount of the expenditure.      Further, §707(b)(2)(A)(ii)(I) uses the term ‘actual monthly expenses’ for allowed additional necessary expenses.  This is to be distinguished from the use of the term ‘applicable’ in reference to the National and Local Standards.  This implies the use of two different standards.  In re Fowler, 349 B.R. 414, 418 (Bankr. D. Del 2006).

   For purposes of the means test of section 707(b), the amounts specified in both the National Standard and Local Standards, including transportation expenses, serve as fixed allowances rather than caps on the debtor’s actual expenses.  Because section 707(b)(2)(A)(ii)(I) “provides that the debtor’s allowed expenses ‘shall be’ the ‘amounts specified’ under the Local Standards—and because the statute makes no provision for reducing the specified amounts to the debtor’s actual expenses—a plain reading of the statute would allow a deduction of the amounts listed in the Local Standards even where the debtor’s actual expenses are less.” See Eugene R. Wedoff, Means Testing in the New 707(b), 79 Am. Bankr. L.J. 231, 454-55 (2005).   The language of section 707(b)(2)(A)(ii)(I) cannot be read as merely specifying caps on the debtors’ actual expenses without significant judicial reconstruction.  Selective judicial revision of the statute, however, is exactly what the US Trustee now seeks.  According to the US Trustee, all of the amounts specified by the IRS under the National Standards and Local Standards are fixed allowances, except one: the car ownership allowance.

            Caselaw supports this interpretation.  In In re Farrar-Johnson, 2006 W.L. 2662709 (Bankr. N.D.Ill. 2006).    While discussing housing expense rather than car ownership allowance, the analysis applies equally well to the case at hand.  Section 707(b)(2)(A)(ii)(I) defines monthly expenses not only as a debtor's “ applicable monthly expense amounts” under the “National and Local Standards” but also as the debtor's “ actual monthly expenses” for the categories the IRS specifies as “Other Necessary Expenses.” 11 U.S.C. § 707(b)(2)(A)(ii)(I) (emphasis added). Congress drew a distinction in the statute between “applicable” expenses on the one hand and “actual” expenses on the other. “Other Necessary Expenses” must be the debtor's “actual” expenses. Expenses under the “Local Standards,” in contrast, need only be those “applicable” to the debtor because of where he lives and how large his household is. It makes no difference whether he “actually” has them. See Wedoff, supra, at 256 (noting that “a plain reading of the statute would allow a deduction of the amounts listed in the Local Standards even where the debtor's actual expenses are less”).  Id. at 5.

The US Trustee argues that in contrast to all other categories covered under the National and Local Standards, the ownership cost component of the transportation expenses serves as a cap on the actual expenses of the debtor. Therefore, the US Trustee argues that debtors who do not make car payments may not deduct the amount specified for ownership costs in the Local Standards. [1]    The US Trustee’s position is premised on two erroneous suppositions: 1) that the car ownership allowance should be treated differently from all the other covered categories under the National Standards and Local Standards and 2) that the methodology used by the Internal Revenue Service[2]  in evaluating a taxpayer’s ability to pay is the same methodology used by Congress to determine a debtor’s ability to pay under the Bankruptcy Code.



2.  Statutory Interpretation

The language of section 707(b)(2)(A)(ii)(I) is clear.  It provides that the debtor’s monthly expenses “shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards…issued by the Internal Revenue Service….”  Transportation allowances fall under the Local Standards and are divided into two components:  operating costs and ownership costs. The Internal Revenue Service (“IRS”) specifies amounts to be used for each component. [3]  Based on the plain language of the statute debtors are permitted to deduct the amounts specified for both components from current monthly income in performing the means test calculation.  There is simply no basis in the statutory language or the legislative history for treating ownership costs differently from all other expense categories covered by the National and Local Standards.

The United State’s argument that the court must look to the actual practices of the IRS are contradicted both by the ownership practices of the IRS, and by IRS treatment of other expenses shown on the means test.  As to the ownership allowance, the IRS allows only the amount of the monthly car payment as an allowance, up to a maximum of $471 for the first vehicle.   However, the US Trustee does not dispute that debtors are allowed the full $471 allowance even if the payment is less than this.   Other expense categories have been substantially changed from IRS standards.  The most substantial of these is allowance of the entire secured creditor payment for expenses; and the elimination of social security income from means test computations.  The Code very clearly does not follow the IRS standards in determining the means test, and such standards should be examined only where specifically referred to, and only to the extent of such specific reference.

Further supporting this rationale is the form itself, which form was itself designed by preeminent national bankruptcy legal scholars.  The form clearly provides for an allowance of the ownership expense regardless of any obligation thereon.  While bankruptcy forms are not themselves law, the fact that the committee so designed the form shows an independent consensus of how such statute should be interpreted. 



3.  Legislative History

   A prior version of BAPCPA which was not passed defined projected monthly net income to require a calculation of expenses to be determined under the Internal Revenue Service financial analysis. H.R. 3150, 105th Congress (1998).  The fact that this was changed from using the IRS financial analysis to the amount allowed under the National and Local Standards evidences Congress’ intent that the Courts not be bound by the financial analysis contained in the Internal Revenue Manual.  Fowler 349 B.R. at 419. 

In developing the 707(b) means test, Congress went to great length to create an objective test, which it felt was a fair and appropriate method by which to determine a debtor’s ability pay.  The highly detailed and complex formulas set forth in amended 707(b) reflect Congress’s attempts to balance two main objectives of the Bankruptcy Code: a fresh start for the debtor and the fair and orderly repayment of creditors when possible.  By contrast, providing the taxpayer a fresh start or repayment of creditors, other than itself, it not a stated goal or objective of the IRS collection process.

In weighing the interests the debtor, secured creditors, unsecured creditors, and other parties in interest, Congress has reasonably determined, and clearly stated, that the amounts specified in the categories covered by the Local Standards, including the ownership component of transportation expenses, are fixed allowances.  It is neither absurd, bizarre, nor demonstrably at odds with Congress’s intent to permit debtors to claim the Local Standards ownership expense based on the number of vehicles the debtor owns, rather than on the number for which the debtor makes payments. See Ron Pair, 109 S.Ct. at 1031 (the plain meaning of the statute should be “conclusive, except in the rare cases [in which] the literal application f the statute will produce a result demonstrably at odds with the intention of the drafters”). See also Wedoff, at 456-57.


4.  Practical Considerations

  Since the means test treats the Local Standards not as caps but as fixed allowances, it is more reasonable to permit a debtor to claim the Local Standards ownership expense based on the number of vehicles the debtor owns or leases, rather than on the number for which the debtor makes payments. This approach reflects the reality that a car for which the debtor no longer makes payments may soon need to be replaced (so that the debtor will actually have ownership expenses), and it avoids arbitrary distinctions between debtors who have only a few car payments left at the time of their bankruptcy filing and those who finished making their car payments just before the filing. Fowler 349 B.R. at 418-19.

It is reality that a car for which the debtor no longer makes payments is more likely to require major repairs or replacement.  It is no surprise that average repair costs rise dramatically after 5 years – after the typical car owner has paid off the lien[4] on the vehicle and after the manufacturer’s warranty has expired.[5]  Indeed, automotive reliability studies show for example that the average 1998 vehicle is 2.5 to 5 times more likely than a 2003 vehicle to have problems with the engine, cooling system, air conditioning and suspension systems.[6]  In addition, 9.3-14.8% of 1998 cars will suffer brake or electrical problems. 

Arguments that debtors without car payments do not need the ownership allowance are based on the faulty assumption that the debtor’s car is likely to run another five years—the likely length of a chapter 13 plan for a debtor above median income --without major repairs or replacement. See Marianne B. Culhane and Michaela M. White, Taking the New Consumer Bankruptcy Model For a Test Drive: Means-Testing Real Chapter 7 Debtors, 7 Am. Bankr. Inst. L. Rev. 27, 44-46 (1999). The operating cost component under the Local Standards include insurance, registration fees, normal maintenance, fuel, parking, and tolls.  See IRM §  Significantly, operating costs do not include major repairs.  As is evidenced by reliability studies, older cars, which are more likely to be paid off, are more likely to require major repairs that are not taken into account in the operating costs set forth in the Local Standards. If the debtor’s car does break down within five years of filing, he or she may be left with no funds to repair or replace the car, no way to get to work, and no way to pay creditors. Congress’s determination to allow all debtors to take the ownership deduction regardless of whether they make car payments is a reasonable and sensible resolution to the problem faced by debtors with older cars that promotes both the idea of a fresh start for the debtor and the repayment of creditors.

Allowing the full car ownership allowance where the debtor owns a vehicle but does not have any car payments avoids “arbitrary distinctions between debtors who only have a few car payments left at the time of their bankruptcy filing and those who finished making their car payments just before the filing.” See Wedoff at 457.  Additionally, limiting the ownership allowance only to those debtors who make car payments as proposed by the US Trustee is also likely to have a disparate impact on the poorest debtors who are more likely to purchase older, used cars.  On average, consumers who purchased used vehicles had the least income of all vehicle purchasers. As noted above, older cars are more likely than new cars to require major repairs not covered in the operating cost component of the Local Standards.  As such, the effect of the US Trustees position is more likely to be borne by debtors with lower incomes.  By contrast higher income debtors who have purchased new luxury cars will realize the greatest benefit from the US Trustee’s position.  Such a result is not only arbitrary but contrary to the purpose and spirit of the new means test.  Certainly in creating the means test, Congress did not intend to penalize debtors with the fewest economic resources and the least ability to pay.  


5.  The cases on the issue so far trend toward allowing such deduction.

            The Court in In re Fowler, 349 B.R. 414 (Bankr. D. Del 2006) denied the U.S. Trustee’s motion to dismiss a chapter 7 case in a case addressing this issue.  The U.S. Trustee argued that the Court must examine the Financial Analysis Handbook published by the IRS to determine the availability of the ownership allowance.  Judge Walrath rejected this argument.  Judge Walrath noted that the Internal Revenue Manual is directly contrary to the plain language of the Code, in that it provides for allowance of the local standard or the car payment, whichever is less.  I.R.M. at ¶4.   Citing the plain language rule described above, the Court found that Congress was able to use language similar to the manual, but declined to do so.  349 B.R. at 418.

            The court rejected the arguments of In re Hardacre, 338 B.R. 718, 728 (Bankr. N.D. Tex. 2006) and In re McGuire, 342 B.R. 608, 613 (Bankr. W.D.Mo. 2006).  Both cases relied on the Internal Revenue Manual rather than the Bankruptcy Code for their decision.  Another problem with the Hardacre decision is that it appears to be a result-driven analysis, rather than an independent analysis of the plain language of the statute.  This is reflected in the following paragraph, showing the Court attempted to match the interpretation to the court’s own view as to Congressional intent.

  The construction adopted by the court has the salutary benefit of leading to a substantive effect that is compatible with the intent of the Act, whereas the debtor's proposed construction does not. Under the debtor's proposed methodology, her unsecured creditors will receive nothing under her plan because, by failing to reduce her allowances under the Local Standards by her average monthly mortgage and car ownership payments, the debtor will have a projected disposable income of zero. Under the construction adopted by the court, however, the debtor will have a projected disposable income in excess of $1,000 per month, which, if applied to the debtor's plan, would be more than enough to pay her creditors in full.

Id. 338 B.R. at 728.

      Judge Vaughn also agreed with Fowler that Congress did not establish the local standards as a cap under §707(b)(2)(A)(ii)(I), but instead made it the actual deduction.  In re Haley, 2006 WL 2987947 (Bankr. D.N.H. 2006).  Under section 707(b)(2)(A)(ii)(I), what makes an ownership expense "applicable" is not whether the debtor is required to make a car payment or whether the deduction would be allowed by the IRS. Rather, whether an expense is "applicable" depends on the number of vehicles owned or leased by the debtor. Further, in section 707(b)(2)(A)(ii)(I), the term "applicable" modifies the phrase "monthly expense amounts specified under the National Standards and Local Standards." With the exception of the ownership expense, all other Local Standards vary depending on where the debtor resides. Thus, where a debtor resides dictates which Local Standards are "applicable." Section 707(b)(2)(A)(ii)(I) incorporates the IRS's figures, but not the IRS's publications and procedures.  Id.  at 3.


6.  Advantage of consistent position of Judges in Tampa Division

            Given that Judge McEwen has already ruled in favor of allowing this deduction, consistency in the rulings from the Judges in the Tampa Division is a desirable goal.   This is not an issue that can be easily adjusted after the case is filed and a judge is assigned.  Not only does the ruling affect filling out the initial Form B22C and the amount to be paid under the chapter 13 plan, but the decision affects the very eligibility of the debtor to file under chapter 7 or chapter 13.  If some judges rule that the deduction may not be taken while others rule that it can, this would force a significant number of debtors to have to risk subsequent conversion of their case based solely on luck of the draw.  Luck should not be a determination for eligibility to file chapter 7.



6.  Projected disposable Income

            The Trustee argues that the Court should disallow the ownership allowance prospectively in the means test even if it is proper initially in the test.  However, absent a change in circumstances, there is no basis to change projected disposable income from the disposable income shown on the means test.  The fact that Congress chose certain allowable deductions in computing the means test, does not suddenly change for future expenses.  Citing COLLIER ON BANKRUPTCY “Because Congress dealt with the issue [amount of plan payment] quite specifically in the ability-to-pay provisions, there is no longer any reason for the amount of a debtor's payments to be considered even as a part of the good faith standard.”  This is supported by the statutory language.  There are new definitions of income and expenses to be used in determining disposable income than under prior law.  These definitions are detailed and inflexible.  §1325(b)(3), by using the term ‘shall’ requires use of the §707(b)(2) means test in determining income available to fund the plan.  In re Barr, 341 B.R. 181, 184-85 (Bankr. M.D.N.C. 2006). 

            “Projected disposable income” is a term predating BAPCPA. In a 1995 opinion, the Fourth Circuit explained that “[p]rojected disposable income typically is calculated by multiplying a debtor's monthly income at the time of confirmation by 36 months, the normal duration of a Chapter 13 plan, then determining the portion of that income which is ‘disposable’ according to the statutory definition.” In re Solomon, 67 F.3d 1128, 1132 (4th Cir.1995)(emphasis added); see also Commercial Credit Corp. v. Killough, 900 F.2d 61, 64 (5th Cir.1990)(stating that, in order to arrive at projected disposable income, one must multiply the debtor's monthly income by the amount of months in the plan and then “assess the amount of the debtor's income that is ‘disposable’ ”). Thus, projected disposable income has been traditionally calculated in conjunction with the definition of disposable income.   In re Alexander, 344 B.R. 742, 749 (Bankr. E.D.N.C. 2006).  As observed by the Honorable Keith M. Lundin, where projected disposable income was a “forward looking concept, requiring bankruptcy courts to ‘project’ the debtor's income into the future,” it has been “transformed by new § 1325(b)(2).” Keith M. Lundin, Section by Section Analysis of Chapter 13 After BAPCPA, NC Bar Assoc. 28th Annual Bankr.Inst. 31 (2005).  Id. at 748.


            A reading of the Bankruptcy Code provisions regarding car ownership allowance consistent with the provisions regarding other expenses shows that the Code differs significantly from the procedures required by the IRS outside bankruptcy.  To read the Internal Revenue Manual to supersede plain language in the Code is error, and contrary to the rules of statutory interpretation, the intent of Congress as evidenced by other provisions in the Code and prior legislation, and by common sense.  The position of the U.S. Trustee in this case would reward higher income debtors who have higher expenditures for car payments, and most hurt the debtors least able to afford higher payments to the creditors.   Debtors and their counsel in Tampa need consistent rulings from the bench on this issue to properly advise their clients both as to the likely repayment in chapter 13, and the very eligibility to file under chapter 7 or 13.

                              Michael Barnett, P.A.


by_/s/ Michael Barnett______________

Michael Barnett

                                                                        Fla. Bar # 500150

506 N. Armenia Ave.

Tampa, FL  33609-1703

                                    Tel. (813) 870-3100

Facs. (813) 877-4039


                                                                Attorney for Debtor

[1] Similarly, the argument that only the remaining secured debt payments may be deducted as expenses in the means test calculation does not withstand textual or policy scrutiny. See Collier on Bankruptcy § 6-707(c)(i) (15th Edition).

[2] The Internal Revenue Manual (“IRM”) plainly provides that the amount specified for all the local standards (including housing, utilities and transportation expenses) serve as a cap.  “The taxpayer is allowed the local standard or the amount actually paid, whichever is less.” See IRM § (emphasis in original).  See also Financial Analysis Handbook. Internal Revenue Manual § available at http://www.irs.gov/irm/index.html.

[3] The IRS publishes the ownership cost component of the Local Transportation Standard on a national basis, by number of cars.  The operating cost component is published by number of cars and by Metropolitan Statistical Area and Census Bureau region.  The Local Transportation Expense Standards may be found at http://www.irs.gov/businesses/small/article/0,,id=104623,00.html

[4] The average length of a car loan is approximately 60 months.  See Consumer Credit, Federal Reserve Statistical Release, November 7, 2005.

[5] A typical manufacturer’s warranty lasts 3 to 5 years and typically covers everything except normal wear and tear and regular maintenance.

[6] See Used Car Buying Kit, Consumer Reports, available at www.consumerreports.org. (providing reliability studies for over 200 cars for the period 1997-2004).