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U.S. Supreme Court Issues Decision In Bankruptcy Case

The United States Supreme Court issued a ruling in a chapter 13 bankruptcy case this week. The case centers on the allowance a debtor is entitled to claim for automobile ownership expenses in creating a chapter 13 bankruptcy repayment plan. A chapter 13 payment plan allows an individual to take certain deductions from their income for reasonable necessary expenses to calculate the individual's projected disposable income. A payment plan typically lasts between three and five years.

A man filed for chapter 13 relief in 2006, shortly after the bankruptcy code was restructured to include the "means test." The debtor took a standard deduction of $471 as a vehicle ownership deduction. The debtor owned a 2004 Toyota Camry, free and clear.

An unsecured creditor filed an objection to the chapter 13 debtor's repayment plan, arguing that the debtor was not entitled to lower the amount of income available for distribution to creditors for vehicle ownership expenses when the debtor owned the car outright.

The Bankruptcy Court and Bankruptcy Appellate Panel for the 9th Circuit allowed the debtor to take the deduction. However, the 9th U.S. Circuit Court of Appeals reversed the decision, disallowing the deduction. The matter was granted review in the U.S. Supreme Court.

Associate Justice Elena Kagan wrote the opinion for the majority of the Court. It is Justice Kagan's first written opinion since she was elevated to the high court. Essentially she says that a debtor cannot take a deduction for automobile ownership expenses when the debtor owns the car free and clear.

She writes, chapter 13 "expenses that are wholly fictional are not thought of as reasonably necessary." Under the decision, deductions for vehicle ownership expenses are limited to chapter 13 filers who have an outstanding car loan or lease contract. The majority carried 8 votes.

Justice Antonin Scalia produced a solitary dissent. Justice Scalia writes, an individual "entering bankruptcy might purchase a junkyard car for a song plus a $10 promissory note payable over several years." He concludes that under the majority's reasoning the individual "would get the full ownership expense deduction." Scalia says Congress wrote the law giving a car owner a car ownership deduction in chapter 13 bankruptcy.

Source: Westlaw News & Insight, "No car payments means no ownership-cost deduction, Supreme Court rules," 12 Jan 2011

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