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9th Cir Rules that 401(k) Loans not Secured Debt for Means Test Purposes
Egebjerg v. Peter Anderson (In re Egebjerg), ---- F. 3d ----, 2008 WL -----
Issue: Is the repayment of a secured loan against the debtor's 401(k) deductible on the means test?
Holding: No.
Direct appeal from the bankruptcy court
Debtor's counsel, Michael Totaro
Judge Hawkins
The debtor is single making $6,100 per month. His unsecured debt was $31,000. Two years before filing he took a loan from his 401(k) which he was repaying at $733 per month. On the means test, he deducted this payment as a payment on a secured debt leaving him with net disposable income of $15 per month. The UST moved to dismiss under both 707(b)(2) and (b)(3). The bankruptcy court agreed that the deduction was proper under (b)(2) but dismissed under (b)(3) on the totality of the circumstances since the loan would be repaid in full in just over one year. The court ruled that even if the deduction was not proper under (b)(2), it would qualify as "special circumstance" which could rebut the presumption of abuse under (b)(2).
The 9th Circuit affirmed but ruled that the bankruptcy court should have dismissed under (b)(2). "We join the vast majority of courts in holding that the debtor's obligation to repay a loan from his or her retirement account is not a `debt' under the Bankruptcy Code." One reason is that the plan will never sue the member; it is simply an offset against future benefits. "Congress expressly gave Chapter 13 debtors the ability to deduct 401(k) payments from their disposable income calculation, 1322(f), but did not include any similar exemption for Chapter 7 debtors. Congress also added a section which provides that the automatic stay does not apply to automatic deductions to repay a retirement plan loan, but expressly stated that the provision shall not be construed to provide that such a loan constitutes a `claim' or `debt.' 362(b)(19). `In light of the amendments sprinkled throughout the Code [addressing 401(k) loans] especially section 1322(f) hat Congress did not intend 401(k) loan repayments to be deducted in Chapter 7.'"
The debtor argued that the deduction was an "other necessary expense." The court rejected that argument, saying "The IRS's guidelines foreclose Egebjerg's contention. The guidelines, which Congress expressly incorporated into 707(b)(2)(A)(ii), state specifically that `[c]ontributions to voluntary retirement plans are not a necessary expense.'" "t is hard to argue that the replenishment of past voluntary contributions to the 401k account by repaying loans is a necessary expense."
As to the "special circumstance," the 9th circuit said that it was possible that it could be a special circumstance but not here. The debtor's "only" reason for borrowing the money in the first place was to pay debts to avoid bankruptcy. This is "commendable" but insufficient. "Indeed, 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 those debts."
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