Title Pawn Loan Not “Ownership Cost”

Posted by NCBRC - September 20, 2016

A debtor may not deduct “ownership costs” under the IRS National and Local Standards for a non-purchase-money security interest in his car. Feagan v. Townson (In re Feagan), No. 16-108 (N.D. Ga. Sept. 6, 2016).

When he filed for chapter 13 bankruptcy, Brian Keith Feagan, an above-median debtor, deducted “ownership costs” for his vehicle based on payments he made on a post-purchase loan secured by the vehicle. Mr. Feagan paid $51.43 per month on a “title pawn” secured by his vehicle which he deducted on the Means Test as “payments on a secured debt” under section 707(b(2)(A)(iii). He also deducted $517.00 from his income as a vehicle ownership expense under the IRS Local Standards based on that loan. His proposed plan did not pay unsecured creditors in full. In order to avoid duplicative deductions, the bankruptcy court required Mr. Feagan to reduce his ownership costs deduction by the amount of his average monthly payment on the secured debt for a total reduction of his projected disposable income by $465.57. The bankruptcy court then confirmed the plan over the trustee’s objection.

On appeal, the court began with Ransom v. FIA Card Servs., 562 U.S. 61 (2011), where that Court held that a debtor who does not make loan or lease payments on his vehicle may not take the car ownership deduction. There, the Court reasoned that the purpose of the deduction was to reflect payments on essential items and, where there were no actual expenses, the deduction was not applicable.

In applying the reasoning of Ransom as well as the IRS guidelines and Local Standards, the district court in Feagan found that a non-purchase-money loan was not the type of car loan contemplated by the IRS’s vehicle ownership costs deduction. The court was persuaded by the language of the Local Standards to the effect that “the ownership costs . . . provide the monthly allowance for the lease or purchase of up to two automobiles.” Also, in the Internal Revenue Manual, ownership expenses specify that they apply to the lease or purchase of a vehicle. The court found that because the IRS standards and guidelines refer to expenses with reference to both lease and payments together, the implication is that both refer to payments related to the acquisition of the car. In the court’s opinion, its finding that the deduction does not apply to post-purchase loans was buttressed by the fact that the deduction amounts listed in the Local Standards were arrived at by reference to average financing data rather than subsequent loans using the car as collateral.

As a policy matter, the court further reasoned that the Supreme Court’s recognition that the deductions were to promote a bankruptcy debtor’s ability to retain essential items like a car, a post-purchase loan for which the car is used as collateral but does not necessarily go to the purchase of essential items, does not fit within the purpose behind the deduction.

The court noted that, if the result of its decision would be to make the plan infeasible, the bankruptcy court has the power to rectify any inequity based on information showing a change in Mr. Feagan’s income that is “known or virtually certain to occur.”

Feagan ND Ga opinion Sept 2016

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