DI to high for 7 & to low for Chapter 13 repayments Due to 401K & 401K Loan

[ASH]

We are being audited by DOJ on our Chapter 7. Lawyer had our 401K loans and investments as a bill/deduction. 401k loans, or investments are not allowed expenses on the chapter 7 means test. Lawyer does not want to argue against the audit, and thinks we should try Chapter 13 now. After looking in to Chapter 13 our disposable income after you add in 401K loans, 401K investments, to the Chapter 13 means test we have a negative disposable income for 13 repayment plan. Has anyone else had a scenario like this, how did it turn out. Any advise would be much appreciated

Thank you in advance for your thoughts.
Ash

[justbroke]

I would work with my attorney. In my division in Florida, you can't have both a 401(k) loan and a 401(k) contribution in a Chapter 13 (unless the contribution is mandatory). I do not know how that applies or if it matters in Montana, so only your Montana-based bankruptcy attorney could answer that question. A 401(k) contribution is allowed in Chapter 13s by law and is not disposable income.

The Trustee could argue that having the loan and the contribution is an abuse because it is a disadvantage to the unsecured creditors. I suppose that if the contribution was mandatory, you could argue that you are allowed to do both, but realize that when the loan is repaid (likely in a Chapter 13), the Trustee will want to up the DMI to match.

You have a lot to work through with your attorney.

[LadyInTheRed]

Your profile says you are in Montana, which is in the 9th circuit. I don't have experience with an Audit, but I do know that 401K loans are not allowed as deductions on the means test in the 9th circuit. https://casetext.com/case/in-re-egebjerg, Voluntary 401k contributions are also not allowed, which I believe, but am not certain, is true in all circuits.

In a Chap 13, a 401k loan is allowed in determining your disposable income, but voluntary contributions may not be. The 9th circuit Bankruptcy Appellate Panel ruled that voluntary contributions are not allowed, but as discussed in the following article focused on California, also in the 9th Circuit, not all courts follow the panel's rulings. http://www.nolo.com/legal-encycloped...ankruptcy.html. I have read that it might be possible to have a contribution allowed as an expenses in Chap 13 if it is considered necessary, like if you are at or nearing retirement age.

How much experience does your attorney have? Did he warn you that the loan and contribution may not be allowed?

[LadyInTheRed]

A 401(k) contribution is allowed in Chapter 13s by law and is not disposable income.

justbroke, might you be confusing a contribution with a loan under Chap 13. Section 1322(f) protects the 401k loan in Chap 13

(f) A plan may not materially alter the terms of a loan described in section 362(b)(19) and any amounts required to repay such loan shall not constitute “disposable income” under section 1325.

[justbroke]

justbroke, might you be confusing a contribution with a loan under Chap 13. Section 1322(f) protects the 401k loan in Chap 13

LadyInTheRed I was thinking about both instances of contribution and repayment. Specifically, I was thinking about the argument in some circuits about what was "not included" in "property of the estate" under 11 USC 541. At least in our district here in Florida, 401(k) contributions, in Chapter 13s, are protected by 11 USC 541 so long as they were in place at the commencement of the case. I know it's one of those areas where there are differences between the circuit courts and maybe even at the local bankruptcy appellate panel level.

I wish every circuit and district were consistent.

11 USC 541(b)(7) (Property of the estate does not include)... any amount... withheld by an employer from the wages of employees for payment as contributions... to...an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974

[ASH]

How much experience does your attorney have? Did he worn you that the loan and contribution may not be allowed?

It was our attorney who added them in the chapter 7 means test, then when we were audited found out they could not be used in chapter 7 means. So maybe not that experienced....... =)

LadyInTheRed do you know what types of life insurance payments can be used for chapter 13 means test? Our lawyer just suggested we invest in life insurance with each other as beneficiary's to assist in decreasing our DI under a chapter 13. Wold both term and whole premiums be eligible?

Thank you all for your responses!!
Ash

[LadyInTheRed]

Yes, justbroke, consistency would be nice. I think that the question of voluntary 401k contributions in a Montana Chap 13 will depend on whether the particular court follows BAP rulings and, if not, how the local court views the question.

[LadyInTheRed]

ASH, I do wonder whether this is a surprise to your attorney or whether he filed your Chap 7 knowing there was a risk the loan and contributions would not be allowed. The 9th Circuit court of appeal ruling I posted a link to is clear that a 401k loan is not an allowed deduction on the Chap 7 means test because it is a loan to yourself and therefor not a real debt. Unlike the BAP ruling regarding contributions in a Chap 13, the Appeals Court ruling about loans in Chap 7 must be followed by all courts in the 9th circuit. If your attorney did not know about it, I would try to find an attorney who will give you a second opinion on how best to proceed. Or, at least ask your attorney some tough questions to which his answer make you comfortable that he has the experience and knowledge to get you the best result.

[despritfreya]

I do not believe I can really add anything to the above. LIR hit the two cases that deal with this issue. Means testing simply does not allow either the loan or contribution. In the 13 the loan repayment is required but, as JB states, Plan payments will increase when the loan is paid off. As to the voluntary deduction, in Arizona, such is on a case-by-case basis. If a creditor does not object and the deduction appears to be reasonable in light of the amount repaid to creditors, the Trustees will allow the contribution. You would have to check local practice/case law in Montana to see how such things are handled.

OP, you do have money to pay a 13 if you stop diverting funds to the retirement plan (not the loan) for the duration of the Chapter 13 Plan so the argument that you do not have the ability to fund a 13 is not going to "win". As to the purchase of life insurance, the cost of term policies can be utilized for means testing however, obtaining such policies now (while you are facing a fight with the US Trustee over whether or not you "qualify" for a 7) is very suspect and smells of bad faith.

I do recommend that you get additional opinions by consulting with one or two other attorneys in your local area. Your attny missed the boat by not knowing that 401(k) loans/contributions are not permitted on the means test.

Des.

[leonel9]

OP, you do have money to pay a 13 if you stop diverting funds to the retirement plan (not the loan) for the duration of the Chapter 13 Plan so the argument that you do not have the ability to fund a 13 is not going to "win". As to the purchase of life insurance, the cost of term policies can be utilized for means testing however, obtaining such policies now (while you are facing a fight with the US Trustee over whether or not you "qualify" for a 7) is very suspect and smells of bad faith.

I believe there was a question about whole life policies. In addition to the good faith concern, I'd highlight the comment about term life (vs. whole life).