title-loanIn In re Feagan, 549 B.R. 811, Ch. 13 Case No. 15-40823 (Bankr. N.D. Ga. April 8, 2016) (click here for .pdf of opinion), the issue before Judge Bonapfel was “whether an ‘above-median’ Chapter 13 debtor with car payments on account of a nonpurchase-money debt may deduct the Ownership Costs allowance for purposes of calculating his projected disposable income (“PDI”) under 11 U.S.C. § 1325(b).”  In his Chapter 13 Plan, the Debtor deducted a vehicle ownership expense of $517 per month for his payments on a title pawn transaction.  The Chapter 13 Trustee objected to the proposed Plan arguing that the allowed deduction is only applicable to purchase money debt or a vehicle lease, and not to non-purchase money debt such as title pawns.

Section 707(b)(2)(A)(ii)(I) of the Code allows above-median income debtors to deduct “applicable monthly expense amounts specified under the National Standards and Local Standards . . . issued by the Internal Revenue Service for the area in which the debtor resides.”  Local standards applicable in Georgia allow a deduction of $517 for the debtor’s first vehicle.  As the total debt owed to the pawnbroker was $3085.16, the parties agreed that the monthly payment in the Debtor’s 60-month Plan was $51.43.

Because § 707(b)(2)(A)(ii)(I), which permits the Ownership Costs deduction, does not permit a deduction for payments for debt, and to avoid duplicative deductions, Mr. Feagan must reduce the Ownership Costs deduction by the amount of the secured debt payment. Accordingly, the net effect of Mr. Feagan’s Ownership Costs deduction is a reduction of his PDI by $ 465.57 ($ 517 – $ 51.43 = $ 465.57).  Mr. Feagan’s monthly PDI, after the Ownership Costs deduction, is $ 153.63. His plan provides for payment of $ 9,250 to unsecured creditors through payments over 60 months. If Mr. Feagan is entitled to the Ownership Costs deduction, his plan satisfies the PDI test because the PDI test requires him to pay only $9, 217.80 (60 x $ 153.63 = $ 9.217.80)…

If Mr. Feagan cannot claim the Ownership Costs deduction, his monthly PDI must be increased by $ 465.57, resulting in a total monthly PDI of $ 619.20 ($ 153,63 + $ 465.57 = $ 619.20). Unsecured creditors must receive $ 37,152 (60 x $ 619.20 = $ 37,152). This amount is less than the approximately $ 37,152, the sum of the general unsecured and priority claims that have been filed.

In Ransom v. FIA Card Services, N.A., 562 U.S. 716, 131 S.Ct. 716 (2011) the Supreme Court held that “the text, context, and purpose” of the statutory provision prevented a debtor “who does not make loan or lease payments” from taking the deduction.  The allowed “applicable monthly expense” is an expense that is “appropriate, relevant, suitable or fit.”

What makes an expense amount “applicable” in this sense (appropriate, relevant, suitable, or fit) is most naturally understood to be its correspondence to an individual debtor’s financial circumstances. Rather than authorizing all debtors to take deductions in all listed categories, Congress established a filter: A debtor may claim a deduction from a National or Local Standard table (like “[Car] Ownership Costs”) if, but only if, that deduction is appropriate for him. And a deduction is so appropriate only if the debtor has costs corresponding to the category covered by the table – that is, only if the debtor will incur that kind of expense during the life of the plan. The statute underscores the necessity of making such an individualized determination by referring to “the debtor’s applicable monthly expense amounts. § 707(b)(2)(A)(ii)(I) (emphasis added) – in other words, the expense amounts applicable (appropriate, etc.) to each particular debtor. Identifying these amounts requires looking at the financial situation of the debtor and asking whether a National or Local Standard table is relevant to him…If a debtor will not have a particular kind of expense during his plan, an allowance to cover that cost is not “reasonably necessary” within the meaning of the statute.
Finally, the Ransom Court stated, “[C]onsideration of BAPCPA’s purpose strengthens our reading of the term ‘applicable.’”

562 U.S. at 69-71.  Judge Bonapfel carefully reviewed the Ransom opinion and the supporting authority, and concluded that non-purchase money debt, including title pawn debt, falls within the category of expenses that may be deducted from the Debtor’s disposable income.

Throughout the opinion, repeatedly and consistently, the Supreme Court referred to “loan or lease” payments, “costs of a car loan or lease,” or “loan or lease costs;” nowhere did the Court state that, to qualify for the deduction, payments had to be a purchase-money debt. Moreover, the Court in the same discussion distinguished car ownership expenses from other expenses of maintaining a car, which the Operating Costs allowance accounts for.

The Operating Costs allowance obviously does not account for any payments for loans and leases. Logically, if costs associated with owning and operating a car are in one category or the other, payments on a nonpurchase-money obligation must be in the Ownership Costs category.

Judge Bonapfel then reviewed the IRS Local Standards for Transportation and the Internal Revenue Service Financial Analysis Handbook and Manual relevant to the issue, and concluded that the materials did not clearly address the distinction between purchase money and non-purchase money debts.

In this Court’s judgment, the IRS Standards and interpretive materials should not be interpreted in the way that courts and lawyers read statutes. The reason is that, unlike statutes in general and the provisions of the means test in particular, the IRS interpretive materials and the Standards themselves do not establish mandatory rules that IRS employees must follow.

The Judge then concluded that the appropriate outcome is that a debtor should be allowed to use the ownership deduction for non-purchase money debts.

If a taxpayer needs a car, it matters not whether payments necessary to retain it are for a loan to finance its acquisition or a nonpurchase-money obligation. “Appropriate judgment” of an IRS employee surely includes the realization that the nature of the encumbrance makes no difference and the common sense conclusion that the Ownership Costs category includes it.
Based on its review of the IRS Standards and interpretive materials quoted and discussed above, the Court concludes that the Ownership Costs deduction is available when the encumbrance arises from a nonpurchase-money obligation.14 The category is, therefore, “applicable” in this case as a permissible deduction under § 707(b)(2)(A)(i)(I)…

Congress defined categories of reasonable expenses. One of them is an allowance for Ownership Costs that is applicable to a debtor with a car payment. The purpose of that must be to permit the debtor to keep the car so that he has necessary transportation. To accomplish that objective, it makes no difference whether the debt is purchase-money or non-purchase money – the debtor must make the car payments to keep the car. If Congressional purpose is relevant to determination of the question at all, treating both types of encumbrances the same way furthers the Congressional purpose of permitting a debtor’s retention of an encumbered car.


Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.