Court Finds 401(k) Loan Not a �Necessary Expense�

[sophia]

Court Finds 401(k) Loan Not a “Necessary Expense”

06/01/2009

The repayment of a 401(k) loan may be a real debt obligation, but it’s not a “necessary expense” for bankruptcy purposes, according to a recent court decision.

Applying the "means test" from the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the United States Court of Appeals for the 9th Circuit held (in an issue of first impression for the court) that the section 401(k) plan loan was not a “secured debt” or a “necessary expense” of the debtor.

Accordingly, the court upheld a bankruptcy court's determination that the debtor's Chapter 7 bankruptcy petition was “presumptively abusive” under the BAPCPA's “means test.”

Source:
Nevin E. Adams
Planadvisor.com

http://www.planadviser.com/compliance/article.php/4424

[spidge]

The article does go on to state that it can be calculated into a chapter 13.

I would rather have my loan changed into a taxable pay out and be done with it. Of coarse The taxes and panalty may become an issue upon filing. This should be up to the account holder anyway.

Maybe I am reading it wrong but is it implying that if you were to file a ch 7 your 401k plan administrator will be forced to change the loan into a distibution thereby freeing up those monthly funds?

You would think that it would be ideal in a ch 13 in favor of the creditors.

[justbroke]

I have done a lot of research on this topic. Specifically around Chapter 7 cases and the "totality of circumstances" that's part of the dismissal reasons in 11 USC 707 (b)(3).

Yes, it was already mostly accepted that 401(k) loan repayments as well as 401(k) contributions could be considered as part of your disposable income, when performing the "totality of circumstances" test under 11 USC 707 (b)(3)(B). There are also other things they can consider there as well!

For a Chapter 7, while the means test allows a debtor to include payments on debt that are "contractually due" even though the debtor is surrendering the property, the "totality of circumstances" test in 707 (b)(3)(B) allows the court to look beyond that applying whatever logic they seem to want. Even though it seems contrary to the other provisions of the means test, in a Chapter 7, the court can apply a "hypothetical" Chapter 13 as yet another test.

In the end, don't read a lot into this ruling. It doesn't mean anything happens to your 401(k) loan. This is specifically a challenge as to whether 401(k) loan repayments (or contributions) are necessary expenses when it comes to the means test. In most Districts, they are not!

Retirement contributions and loan repayments are treated better in Chapter 13s.

[banca rotta]

See this way debtors won't be able to contribute anything towards retirement because it takes a back seat to the financial services industry.

Now when the debtor pays off their chapter 13 payments they can go into welfare when they are too old to work.

The ruling is total BS!!

Someone is going to get screwed here. Id rather it be the banks then the American taxpayer feeding 100 million senior citizen welfare recipients.

Maybe the banks will learn they have it all wrong.

[justbroke]

Now when the debtor pays off their chapter 13 payments they can go into welfare when they are too old to work.

This ruling is related to a Chapter 7. While it's still a debate in "some" Districts, contributions and repayments to 401(k) (403(b) and other retirements plans, excluding IRAs) are protected and are not disposable income in a Chapter 13.

I have only seen these issues when the person, filing a Chapter 7, was over the median and the Trustee is attacking the case on the "totality of circumstances" under 11 USC 707(b) (specifically 11 USC 707 (b)(3)(B)).

I don't believe it's as harsh as you believe that it is. This is a very specific part of the BAPCPA and for Chapter 7 cases You can blame those debtors who came before us (you and me) for abusing the system. The multi-millionaire CEO who filed Chapter 7 and kept everything.

[brendamc67]

I have a question regarding this. My 401k loan is taken out of my pay directly. Can I deduct it as a witholding from my paycheck, or is that not an option at all?
If I don't pay the loan back ... well, I think the only way that I can't pay it back is if I quit my job or they fire me. Neither of these things are acceptable.
Now I'm really worried.....

[jdcat]

I was worried about this also but we listed it as a payroll deduction on our schedule I and have not had a problem. And we're talking over $500 a month! We've already filed and had our 341.

[brendamc67]

Mine is pretty small ($140 a month). We make less than the median for our state, so I guess we don't have to take the means test, but I've been sweating our expenses. With that loan, we are at minus 200 a month. We have yet to see our attorney, though, and i have no idea if all our expenses are even acceptable.
Thanks for the reassurance!!

[justbroke]

I have a question regarding this. My 401k loan is taken out of my pay directly. Can I deduct it as a witholding from my paycheck, or is that not an option at all?

Not unless it's a "mandatory" contribution, and loan repayments are not mandatory, according to caselaw in most Districts.

Mine is pretty small ($140 a month). We make less than the median for our state, so I guess we don't have to take the means test, but I've been sweating our expenses. With that loan, we are at minus 200 a month.

I wouldn't worry. Even if the "pretty small" loan is added back in, you're still at $-60 a month. There's no worrying at all. Add to it that you're under the median, you should sail through.