Clunker Allowance Disallowed in Ninth Circuit

Remember when you learned about the three branches of government in grade school? You were taught that the Legislative Branch wrote the law, the Judicial Branch interpreted the law, and the Executive Branch enforced the law. Our Founding Fathers divided powers between the branches to prevent control of our government by one man or one group.

Prior to 2005, the federal bankruptcy courts enjoys wide latitude to fashion just results by interpreting the federal bankruptcy laws (written by Congress) so that both creditors and debtors were treated fairly. But fair wasn’t good enough for the credit card and banking industry, so they pumped millions of dollars into changing the Bankruptcy Code. One of the most radical changes was the introduction of a Means Test, which disqualified many individuals from filing Chapter 7 liquidation bankruptcy. In addition, Congress directed the bankruptcy courts to use the Internal Revenue Service’s National Standards and Local Standards to cap expenses that individuals could claim during bankruptcy. See Section 707(b)(2)(A)(ii)(I). Prior to 2005, bankruptcy judges had discretion to review expenses when allowing an individual to file Chapter 7. Now, much of this discretion has been replaced by the IRS Standards, which the IRS frequently changes, revises, and interprets for non-bankruptcy purposes.

One area that has caused bankruptcy courts problems in interpreting the law is a found in an IRS expense for an older, high mileage vehicle. You see, the IRS allows a delinquent taxpayer with a paid-for car more than 6 years old or with more than 75,000 miles to deduct an extra $200 for the expense of operating an older or high mileage vehicle, often called the “clunker allowance.” See Internal Revenue Manual at 5.8.20.3. Some bankruptcy courts have allowed the debtor to claim this expense when calculating Chapter 7 Means Test expenses, even if the car is financed which means the debtor can get a double deduction. See, e.g., Babin v. Wilson (In re Wilson), 383 B.R. 729 (8th Cir. BAP 2008); In re Oliver, 350 B.R. 294 (Bankr. W.D. Tex. 2006); and In re Barraza, 346 B.R. 724 (Bankr. N.D. Tex. 2006). Other bankruptcy courts have not. See, e.g., In re Sisler, 464 B.R. 705 (Bankr. W.D.Va. 2012); In re Schultz, 463 B.R. 492 (Bankr. W.D. Mo. 2011); In re Hargis, 451 B.R. 174 (Bankr. D. Utah 2011); In re VanDyke, 450 B.R. 836 (Bankr. C.D. Ill. 2011); and In re May, 390 B.R. 338 (Bankr. S.D. Ohio 2008).

The central issue that divides these courts is deciding what IRS standards are incorporated into the bankruptcy Means Test. This issue was recently addressed by the Ninth Circuit Bankruptcy Appellate Panel in In re Luedtke, MT-13-1313-KuPaJu (9th Cir BAP, 04/09/2014). Courts that disallow the clunker allowance point out that the plain language of the Bankruptcy Code only allows the court to use expenses specified under the National Standards and Local Standards. Courts that allow the clunker allowance point out that the Bankruptcy Code does not define what constitutes the National Standards and Local Standards. These courts adopt a more expansive view to permit the debtor to use the expenses found in the Internal Revenue Manual.

Until this matter is ultimately resolved, the prudent debtor may consult the Statement of the U.S. Trustee Program’s Position on Legal Issues Arising under the Chapter 7 Means Test, which guides the Chapter 7 panel trustees on the issue:

The official Debtors located outside of the Fifth, Seventh, and Eighth Circuits [and perhaps the Ninth Circuit after Luedtke] who operate vehicles not subject to a loan or lease may deduct an additional $200 if the vehicle is owned by the debtor, and is older than six (6) model years or has more than 75,000 miles.

If the debtor’s case is filed outside the Fifth, Seventh, and Eighth [or Ninth] Circuits, it is prudent to take a hard look at the vehicle age and mileage of the debtor’s vehicles. Mileage or age may eat up another $200 of Current Monthly Income and lower the debtor’s Chapter 13 plan payment or qualify the debtor for Chapter 7.