Category Archives: Means Test

401K Loan Repayment – Means Test

401K Loan Repayment - Means Test401K Loan Repayment Means Test. Can a Chapter 7 debtor deduct 401K loan repayment means test – from their monthly income (CMI)? The answer is it depends.

In re Egebjerg, 574 F.d 1045 (9th Cir. 2009) held that a Chapter 7 debtor could NOT deduct 401K loan payments from CMI. The Court construed Section 707(b)(2)(A)(iii), which allows debtors to deduct average monthly payments on account of “secured debts” and determined that the obligation is not a “debt” or “claim” as those terms are used in the Bankruptcy Code. The debtor is essentially repaying the debt to himself. 574 F.3d at 1049. the Court also rejected the debtor’s contention that the repayments could be deducted as an “other Necessary Expense” under Section 707(b)(2)(A)(ii). that section refers to categories specified by the IRS, and 401(K) repayments do not fit into any of the listed categories in the IR manual. Finally, the court rejected the argument that the deductions should be allowed as “special circumstances” under Section 707(b)(2)(B). The debtor testified that he used the loan proceeds to pay off bills in the hope of avoiding bankruptcy. In the Ninth’s Circuit’s view, “if the original unsecured consumer obligation could not be considered a special circumstance, it would seem problematic to find ‘special circumstances’ for the 401(K) loan that merely replaced these debts.” Id. at 1053.

In contrast we have another case, In re Cribbs, 387 B.R. 324 (Bankr. S.D. Ga. 208)( Davis, J.). The Chapter 7 debtors argued that their repayment of a 401K loan constituted “special circumstances” under Section 707(b)(2)(B) that justified rebuttal of the presumption of abuse on the means test. Judge Davis held that the debtors’ mere obligation to reimburse their 401(K) plan was not sufficient to constitute special circumstances, “but the circumstances that lead to taking that loan may be “special” under Section 707(b)(2)(B)(I).” 387 B.R. at 328. Those circumstances were present in this case, where the debtors had borrowed from their 401(K) plan in an effort to replay their debts without resorting to bankruptcy. The repayment was voluntary, but non-manipulative, arising “under circumstances” affirmed by clear public policy. Id. at 330.

401K loan repayment means test deduction – for more information about Bankruptcy and the means test  – contact Cynthia Remboldt, at the Remboldt Law Firm at 404-348-4081. FREE consultations can be scheduled by calling 404-348-4081.  Evening and Weekend hours are available to meet with an attorney.  If bankruptcy turns out to be the best way to move forward considering your alternatives, goals and financial challenges, payment plans are available if you need them.