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9th Cir Rules that 401(k) Loans not Secured Debt for Means Test ...
In a message dated 5/31/2009 10:18:02 AM Pacific Daylight Time,
Jhayes@polarisnet.net writes:
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 berepaid 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 accountis 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 asection which provides that the automatic stay does not apply to automaticdeductions to repay a retirement plan loan, but expressly stated that theprovision 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) lack of a 401(k) provision in section 707 is a glaring indication that
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." Thecourt rejected that argument, saying "The IRS's guidelines foreclose
Egebjerg's contention. The guidelines, which Congress expressly incorporated
into 707(b)(2)(A)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 expresslyincorporated into 707(b)(2)(A)(i
As to the "special circumstance,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) lo
Aside from the obvious, it is a frightening decision for many other
reasons:
First, the 401k loan is not a debt under the bankruptcy code. (Does
this mean that it cannot be repaid in a chapter 13?)
Second, while the court mentions tax consequences twice, it never
discussed the impact of the constructive distribution. (Perhaps, now, that
should be deducted as a priority tax claim?)
Third, the definition of special circumstances is unreasonably narrow.
Lastly, the Court went out of its way to reach the (b)(2) conclusion. (The lower court had dismissed under (b)(3).) For anyone involved was
there something else going behind the scenes that caused the court to react so
negatively to this case ?
Be careful out there.
Eric
Law Office of Eric Alan Mitnick
21515 Hawthorne Boulevard, Suite 1080
Torrance, CA 90503
(310) 792-5864; 792-5866 (fax)
MitnickLaw@aol.com
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