Can a Debtor Really Keep an Escalade?

The intent of Congress when implementing BAPCPA in 2005 was to prevent abuse of the bankruptcy system and to ensure that those who can afford to repay some portion of their unsecured debts be required to do so. Recently, several courts have ruled on the issue of a debtor's right to deduct secured obligations for luxury items from his or her Current Monthly Income (CMI) with results seemingly contradictory to the legislative intent of BAPCPA. Recently this issue came before Judge Gorman of the Central District of Illinois in In Re Carlton, 370 B.R. 188, (Bankr. C.D. Ill., 2007).

The Trustee in In Re Carlton objected to the Debtors' Schedule I, Official Form B22C, and confirmation of the Debtors' Chapter 13 plan. He asserted that the Debtors were not paying all of their projected disposable income into the plan. Projected disposable income under BAPCPA is based on CMI minus certain allowed expenses. Debtors use Official Form B22C to calculate their CMI and determine their projected disposable income. In the case of above-median debtors, such as the Carltons, income and expenses are calculated according to 1325(b)(3) which in turn, looks to the "means test" expenses found in section 707(b)(2)(A). Section 707(b)(2)(A)(iii) instructs that, for secured obligations, the allowed monthly expense is the contractual amount due over five years divided by 60. This amount is then deducted from the debtors' CMI in order to determine their projected disposable income. In In Re Carlton, the Debtors took a monthly expense deduction for each of their three vehicles, including a 2003 Cadillac Escalade. These deductions reduced the amount of money the Debtors were required to put towards their Chapter 13 plan by reducing their projected disposable income, and ultimately reduced payments to their unsecured creditors.

The Trustee argued that the Debtors should not be permitted to take a deduction from their CMI for each of their three vehicles. The Trustee had specific concerns with the Carltons' $604.71 deduction for their Cadillac Escalade. He asserted that the Court should have denied any deduction for the Debtors' obligation related to this car because it was a luxury vehicle and, therefore, not a reasonable or necessary expense.

The Trustee further argued that if the Court ruled correctly with regard to the secured debt deductions, the Debtors' plan could not have been confirmed pursuant to section 1325(b). Section 1325(b)(1)(B) requires that, if the trustee or holder of a secured claim objects to the confirmation of the plan, the court may not approve the plan unless it provides that all of the debtor's projected disposable income be applied for payment to the unsecured creditors under the plan. If the Debtors had not been permitted to take the secured debt deduction for their Cadillac, their projected disposable income would have been increased by the $604.71. Consequently, the Debtors' plan would not have been confirmed as proposed because it would not have included all of the Debtors' projected disposable income.

However, the Court did not agree with the Trustee's position and held that the Debtors' deductions were all properly taken. The Court declined to impose its own judgment on the issues of reasonableness and necessity with regard to the Debtors' secured debt deductions. Judge Gorman held that the section 707(b)(2) prevented the Court from implementing a reasonable and necessary standard on secured debt deductions. She explains that, because Congress inserted the reasonable and necessary language into certain sections of BAPCPA, it can be determined that, with respect to other sections, Congress did not intend for that language to apply. The language of section 707(b)(2)(A)(iii)(I) specifically states that the deductions should include the "total of all amounts scheduled as contractually due" and does not impose a "reasonable and necessary" requirement for the collateral. Additionally, the section provides a precise formula for the calculation of the deductions allowed.

The Court contends that, when these inclusions are taken into consideration, Congress could not have intended to allow the secured debt deductions to be subject to a reasonable and necessary standard without including such language specifically. For that reason, the Debtors were entitled to include the secured debt deductions for all three of their vehicles. This holding may have significant consequences with regard to unsecured creditors in Chapter 13 cases. Essentially, this interpretation of section 707(b)(2)(A)(iii) and secured debt deductions allows debtors to take an unlimited number of deductions for an unlimited amount, so long as the deduction is determined by the formula set forth in the section. These deductions could reduce the amount of a debtor's projected disposable income considerably, thereby also reducing the amount distributed to general unsecured creditors through the Chapter 13 Plan.

Becket & Lee disagrees that section 707(b)(2)(A)(iii) allows a debtor to take a monthly allowance for any collateral, frivolous or not, as is the majority interpretation of this section. See the article authored by attorneys at B&L in The Quarterly, a National Association of Chapter Thirteen Trustees publication.