Including additional taxes for 401(k) loans not allowed in Ch 7 budget
Posted: Sat Jan 30, 2016 10:59 am
The hang up with that though is the contingent tax claim is postpetition. In keeping with the false assumption that 401(k) loan payments are actually voluntary, is it appropriate For a debtor to include the contingent taxes in the budget even if the contingency is not actually triggered?
Mark Jessee
Sent from my iPhone
> On Jan 30, 2016, at 9:31 AM, David Tilem DavidTilem@TilemLaw.com [cdcbaa] wrote:
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> The tax obligation is a contingent claim which should be included in the schedules. The contingency, of course, is the failure to repay the loan.
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> David A. Tilem
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> Sent: Friday, January 29, 2016 10:48 PM
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> Subject: [cdcbaa] Including additional taxes for 401(k) loans not allowed in Ch 7 budget
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> The 9th Circuit in Egebjerg held 401(k) loans are not monthly payments on account of secured debts or other necessary expenses that can be deducted from a Chapter 7 debtors monthly income for purposes of calculating the debtors disposable monthly income under 707(b)(2). In its analysis the 9th Circuit states that "the loan repayments themselves are voluntary in the sense that Egebjerg can simply ask the loan administrator to treat his outstanding loan balance as an early withdrawal from his 401(k) and thereby relieve himself of a future repayment obligation. Doing so would have tax consequences, but Egebjerg would retain the use of most of the money loaned." Maybe that was the case with Egebjergs plan but my experience is that most employers plan do not allow it.
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> The Ejegberg court acknowledges that there are tax consequences to the early withdrawal but does not address that impact on a Chapter 7 debtorlance of the loan is treated as taxable income in the current year when the default occurs. Additionally there is a 10% federal and 2 % California early withdrawal penalty. Those taxes technically have to be paid in the current year.
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> As the taxes are not a prepetition debt, but owed at the end of the year, it would seem to me a Chapter 7 debtor should be able to calculate the additional taxes owed as a result of the nonpayment of the 401(k) loan and add 1/12 of the additional taxes into his monthly expenses both on Schedules I/J and the Means Test. What say you?
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> How about if the employer does not allow an employee to cease 401(k) loan payments because of financial hardship or Chapt 7 bankruptcy so long as employee remains employed and that employee does not plan to quit? Obviously if the 401(k) loan payments continue to be removed from each pay check, extra early withdrawal taxes will not be owed. That said, if a debtor is prohibited from including 401(k) loan payments in the means test calculation and in Schedule I/J (even though forced to pay them by the employer) should not the resulting taxes from those 401(k) loan payments noninclusion be allowed? Or is turnabout not fair play?
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> Mark Jessee
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The hang up with that though is the contingent tax claim is postpetition. In keeping with the false assumption that 401(k) loan payments are actually voluntary, is it appropriate For a debtor to include the contingent taxes in the budget even if the contingency is not actually triggered?Mark JesseeSent from my iPhoneOn Jan 30, 2016, at 9:31 AM, David Tilem DavidTilem@TilemLaw.com [cdcbaa] <cdcbaa@yahoogroups.com> wrote:
The tax obligation is a contingent claim which should be included in the schedules. The contingency, of course, is the failure to repay the loan.
The post was migrated from Yahoo.