Bankruptcy

What is the government interest in bankruptcy cases?

By Katie Porter

On Monday, the Supreme Court will hear arguments in Ransom v. MBNA, an appeal of a decision in a consumer bankruptcy case. The Bankruptcy Code requires chapter 13 debtors to commit all their "projected disposable income" to repaying their creditors. After 2005, for debtors whose income exceeds the median in their state, disposable income is determined by deducting certain expenses. In the Ransom case, the issue is whether a "debtor?s applicable monthly expense amounts specified under the National Standards and Local Standards [of the IRS]? includes the cost of ownership for a vehicle that is not encumbered by a loan or lease.The statutory language is unclear, to put it mildly, and there are plausible readings of the statute that support either permitting or denying the expense.  So why is the U.S. government throwing its weight behind MBNA Bank and arguing that debtors should not be permitted to take the ownership deduction for vehicles that a debtor owns outright? What exactly is the government's interest in this case? Why are our taxpayer dollars at work here in briefing and arguing a dispute in which the adversarial aspect of bankruptcy (debtor and creditor litigating) seems to be fully functional?

The short answer is that I have no idea what the government is doing because I do not see what the government has at stake in the interpretation of this statute. The usual "the government is often a creditor" argument does not hold up very well here. The government will rarely be an unsecured creditor whose recovery will be determined by the means test. Instead, it seems to me that as a matter of public policy the government might have an interest in encouraging Americans in financial trouble to pay down their car loans and live frugally by driving an old car without a loan, as opposed to loading up on car debt before filing bankruptcy to ensure the deduction is available. Indeed, much of the purported purpose of BAPCPA was to discourage borrowing shortly before bankruptcy. That isn't to suggest that I think the real issue is that the government is on the "wrong" side of the dispute; I am arguing they just should let the debtor and creditor represent their own interests here, without the government putting a "thumb" on either side.

The best reason I can come up for the government's participation in Ransom is that because the US Trustee Program reviews and objects to repayment plans, it may have an interest in uniformity among courts on this issue (the Ninth Circuit's decision in Ransom created a circuit split). But that justification for participation ended once the Supreme Court granted certiorari. At that point, there will be a resolution. The government's participation does not add to the ability of the Supreme Court to reach a decision one way or the other.

I did look at the government's brief in Ransom which has a promising section "Interest of the United States." But its asserted justification would permit the government to appear in every bankruptcy case. ("The United States has a direct interest in the resolution of that question because United States Trustees?who are Department of Justice officials appointed by the Attorney General?supervise the administration of bankruptcy cases.")  The government's participation in Ransom is likely to make a difference--at least at the margins--in the Court's decision. But what's the public payoff here? Shouldn't the Solicitor General be spending their resources litigating criminal cases or federal tax disputes and leave it up to the Commercial Law League to file an amicus in support of MBNA?

Full post as published by Credit Slips on October 01, 2010 (boomark / email).