Monthly Archives: April 2014

Can the Extra $200 IRS Deduction for Having A High Mileage Car or Old Car Still be Used? The Ninth Circuit BAP In Luedtke Say No

By Ryan C. Wood

If you have an old car chances are you are paying more in operational expenses for the old car than a newer one would cost. Most people would agree they have to pay more for repairs such as changing worn out brakes, needing new tires, may be needing a new transmission, timing belt, car engine and other maintenance and service needs for their old car. The bottom line is you need to put more money into your car for the wear and tear. For years bankruptcy attorneys have added an extra $200 pursuant to the IRS standards for old vehicles due to additional maintenance costs. The Ninth Circuit Bankruptcy Appellate Panel in Drummond v. Luedtke (In re Luedtke), BAP No. MT-13-1313, 9th Cir. BAP (Apr. 9, 2014), the 9th Circuit said this extra expense can no longer be used in Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income (Official Form 22C).

Different jurisdictions have different rulings when it comes to this issue. Some jurisdictions allow an additional $200 deduction for an “older vehicle operating expense” in the Official Form 22C because they acknowledge the fact that older cars do cost more to maintain. Some jurisdictions do not. Unfortunately for debtors, last week the Ninth Circuit Bankruptcy Appellate Panel moved the Ninth Circuit to the “not allowed” side.

Mr. & Mrs. Luedtke filed a Chapter 13 bankruptcy case in Montana. They had two cars and claimed an additional $200 deduction for an “older vehicle operating expense” on their Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income because one of their cars was a 1993 Ford Taurus with 118,000 miles. The trustee objected to the Chapter 13 plan the Luedtkes proposed because the trustee indicated that the additional $200 expense deduction could have been paid into the plan to benefit general unsecured creditors. The bankruptcy court overruled the trustee’s objection and the trustee appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.

According to 11 U.S.C. §1325(b)(1), all of the debtors’ projected disposable income (this figure is derived from the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, Line 59) needs to be paid to general unsecured creditors. What is this statement determining how much unsecured creditors should receive in the plan? The statement of disposable income takes into account your income averaged over the last six months and compares this average income with the median income for the number of people in your household in the county you live. If you are below the median income in your county then the commitment period can be 36 months. If you are above the median (meaning your income is higher than the median income for your county based on the number of people in your household) the minimum commitment period for the plan has to be 60 months and the statement of disposable income is filled out further. Most of the expenses or deductions from your income are based on IRS National Standards and Local Standards, not your own personal monthly expenses. If your personal expenses are higher than the IRS National Standards and Local Standards you still only receive the deductions calculated by the IRS and not what you actually spend. If you are spending more than the IRS standards, in theory it means you are spending above what you can afford. After all allowable expenses are deducted from your income you end up with the “projected disposable income” figure. This is the minimum amount the general unsecured creditors must receive in the Chapter 13 plan. If you need more help understanding this process you should speak with bankruptcy lawyers in your jurisdiction.

The Bankruptcy Appellate Panel in Luedtke case held that the additional $200 deduction for the older vehicle expense is not listed in the IRS’s Financial Analysis Handbook. The only place that references the extra $200 deduction is under a chapter that only dealt with compromise proposals from taxpayers that are late in paying their taxes. That chapter has to incorporate the chapter in the IRS manual that provides for the National Standards and Local Standards but it is not reciprocal, meaning the National Standards and Local Standards do not incorporate the $200 older vehicle expense. Therefore the court indicated the $200 additional deduction for an older vehicle expense is not allowed to be used in the Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income to reduce bankruptcy filer’s monthly disposable income.

Can I Treat My Unsecured Creditors Differently in My Chapter 13 Plan?

By Ryan C. Wood

When you file a Chapter 13 bankruptcy case it is expected that all your general unsecured creditors will be treated equally. You have to treat your secured creditors and priority unsecured creditors differently but your general unsecured creditors will all be paid the same percentage in your Chapter 13 plan, right? The answer is: it depends.

Pursuant to 11 U.S.C. §1322(b)(1), the Chapter 13 plan may designate different classes of unsecured claims so long as the plan does not unfairly discriminate against the different classes. 11 U.S. C. §1122(a) provides: Except as provided in subsection (b) of this section, a plany may place a claim or an interest in a particular class only if such claim or interest is substantially similar to t he other claims or interests of such class.  However, the Chapter 13 plan may treat a claim for a consumer debt differently than other unsecured creditors if there is another person who is also liable for the debt along with the person filing for bankruptcy. The interpretation of this statute varies amongst the different jurisdictions so it is best to consult with a bankruptcy attorney about how your jurisdiction treats this statute.

In the case of In re: Renteria, 470 B.R. 838 (9th Cir. BAP 2012), Ms. Renteria filed for Chapter 13 bankruptcy. In her Chapter 13 plan she proposed to pay her former attorney (whom she owed about $20,000) 100% of the this claim or debt plus 10% interest because her mother personally guaranteed the debt for Ms. Renteria. Her former attorney filed suit against both Ms. Renteria and her mother in state court to recover the funds owed to him and there was currently a default judgment entered against her mother prior to the filing of Ms. Renteria’s bankruptcy case. The Trustee objected to the Chapter 13 plan because he contended the plan unfairly discriminated against the other unsecured creditors since the unsecured creditors will receive 0% repayment in the Chapter 13 plan while the former attorney will receive 100% plus 10% interest despite Section 1322(b)(1) providing the different treatment of co-signed debts.  Ms. Renteria filed a declaration to provide more information about the circumstances of the treatment of her former attorney’s debt. She retained her former attorney to help her with a domestic violence and paternity lawsuit. She would not have been able to retain the services of her former attorney without her mother personally guaranteeing the attorney fees and expenses. Ms. Renteria also indicated that since she had no non-exempt assets her other unsecured creditors would not have been in a worse position if she filed a Chapter 7 bankruptcy case. The bankruptcy court overruled the Trustee’s objections and confirmed the case and the Trustee appealed.  The Ninth Circuit Bankruptcy Appellate Panel affirmed the lower court’s overrule of the objection to confirmation and confirmed/approved the chapter 13 plan.

Courts are split on the interpretation of the “however” clause in §1322(b)(1). A majority of the courts hold that debts that are co-signed (or co-obligated) by another person still need to clear the unfair discrimination hurdle. A minority of the courts believe that the “however” clause is plain and unambiguous and indicates that co-signor or (co-obligors) claims are exempted from the unfair discrimination rule. The Renteria court examined the construction and placement of the “however” clause. The one thing the courts have concluded is that different courts will disagree on the meaning of the “however” clause.  Basic statutory interpretation though requires the word however not be ignored and arguably holding that co-signed debts or claims cannot be treated differently would make the however clause meaningless.  The wrong approach to statutory interpretation.  The Renteria court then looked at legislative history. The Renteria court examined the cases listed in the legislative history (In re Utter, 3 B.R. 369 (Bk.W.D.N.Y. 1980) and In re Montano, 4 B.R. 535 (Bk.D.D.C. 1980)), and found that Congress was trying to address these two cases in the §1322 statute. In the Utter case, Utter separated out one claim to pay 100% and all other unsecured claims received little to nothing. The 100% claim was due to the fact that Utter’s sister was obligated to the same debt. The court in Utter denied confirmation because the preferential treatment discriminates unfairly against the other unsecured creditors that do not have co-signed debts. In the Montano case, the claims guaranteed by co-signors received 100% payment and all other unsecured creditors received 1% payment. The court listed the same reasoning as the Utter court: that the other general unsecured claims were being unfairly discriminated against.

The Renteria court concluded that Congress wants to permit a person filing a Chapter 13 case to separately classify the debts where a third party is co-obligated to the debt and to prefer the co-obligated debt when facts are similar to In re Utter and In re Montano.  This case and many others leave open the rest of Section 1322(b)(1) and when other types of general unsecured debts can be separately classified and treated differently.  There is no clear rule or analysis to draw from about what is unfair discrimination.  Discrimination is clearly allowed but when does it become unfair is the question to be answered.  So far it seems like the unfair part of the discrimination analysis has been rendered meaningless.  Most courts deny confirmation of plans any time there is any type of different treatment and have a blanket rule that all discrimination is unfair.  This cannot be of course.  There has to be some form of discrimination between general unsecured claims that is allowed and held to not unfair discrimination. 

If you are thinking of filing a Chapter 13 bankruptcy case that has co-signed debt it is best to consult with Chapter 13 bankruptcy attorneys to help you through the process.