January 11, 2011

Supreme Court Decides Ransom v. FIA Card Services

On January 11, the Supreme Court decided Ransom v. FIA Card Services, No. 09-907, holding that a debtor who does not make loan or lease payments may not take the car-ownership deduction under the Bankruptcy Code's "means test."

The case arose when Jason Ransom filed for Chapter 13 bankruptcy relief and listed FIA as an unsecured creditor. To determine how much a debtor can pay his creditors, Chapter 13 uses the "means test," which instructs a debtor to deduct specified expenses from his current monthly income. The result is the debtor's "disposable income"—i.e., the amount he has available to reimburse creditors.

In determining his monthly expenses pursuant to this formula, Ransom claimed a car-ownership deduction, as well as a separate deduction for car-operating costs, and then proposed a plan that would have resulted in repayment of approximately twenty-five percent of his unsecured debt. FIA objected on grounds (1) that Ransom should not have claimed the car-ownership allowance because he did not make loan or lease payments and (2) that because he did claim the allowance the plan did not direct all of Ransom's disposable income to unsecured creditors. The Bankruptcy Court agreed with FIA and denied confirmation of the plan. The Ninth Circuit Bankruptcy Appellate Panel and the Ninth Circuit affirmed.

The Supreme Court likewise affirmed, holding that a person who owns a car free and clear is entitled to the "operating costs" deduction but not the "ownership costs deduction." It based its conclusion on statutory construction of the Bankruptcy Code, which provides that a debtor may claim only "applicable" expense amounts listed in IRS-issued standards. It held that because Congress intended the means test to approximate the debtor's reasonable expenditures on essential items, a debtor should be required to qualify for a deduction by actually incurring an expense in the relevant category.

Justice Kagan delivered the opinion of the Court, in which Justices Roberts, Kennedy, Thomas, Ginsburg, Breyer, Alito, and Sotomayor joined. Justice Scalia filed a dissenting opinion.

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