Bankruptcy Means Testing

| Dec 9, 2010 | Bankruptcy |

A case out of the Northern District of Texas occurred where an unsecured creditor objected to the confirmation of an above medium income debtor’s proposed Chapter 13 Plan as failing to satisfy the “projected disposable income” requirement and was not being proposed in good faith.  In particular, the creditor asserted that the debtors had not committed all of their disposable income to plan payments.  At issue was the debtors’ ability in performing the Means Test calculation to take standard vehicle ownership expense deductions in excess of their actual car payments or to take a deduction for payments that they were making on a recreational vehicle showing that the vehicle was necessary for the support of the debtors or their dependents.

The Bankruptcy Court held that the above medium debtors were entitled to deduct the standard vehicle ownership expenses for which they qualified based on the two cars in which they were making payments when their petition was filed, even if these standard deductions arguably exceeded the “amount actually spent” by debtors on these cars.  The Court agreed that the Internal Revenue Manual was an instructive guide for applying the IRS standards, but the Court did not apply the manuals directive the tax payers may claim the lesser of the vehicle ownership’s expense deduction or the amount totally spent, finding that the phrase the amount totally spent to be ambiguous in the Bankruptcy Context.  Because of this ambiguity, the Court concluded that the applicable monthly expense amount was set by the local standards even when these amounts exceeded the amount actually spent.