Wednesday, October 27, 2010

[Overview] Debtor not subtract 401(k) loan repayments in test of partial failure as a necessary expense

Reimbursement of a debtor of a loan of 401(k) plan did not constitute a payment of debts guaranteed or a necessary expense that could be deducted from the monthly income of the debtor for the purposes of testing means, Chapter 7 bankruptcy code, according to the u.s. Court of Appeals in San Francisco (CA-9), in Egjebjerg v. Anderson, a case of first impression.

401(k) loan was unable to stave off bankruptcy

In an effort to avoid bankruptcy, an employee has acquired a loan from your 401(k) plan, which was repaid through an automatic monthly deduction from his salary of $ 733.90. Two years later, the employee filed for bankruptcy Bankruptcy code, claiming the monthly income of $ 15.31, Chapter 7. Calculation of the employee of his monthly income reflects its inclusion of repaying the loan the 401 (k) as a necessary expense.

The trustee in bankruptcy has contested the petition of Chapter 7, holding that the repayment of loans were not a necessary expense, and that the deposit of the debtor was presumptively unfair under Chapter 7 means test. initially, the U.S. Bankruptcy court in California found that the loan was a debt guaranteed that could be deducted from the income of the borrower for testing purpose means. However, when considering all the circumstances of each case, the judge dismissed the petition of Chapter 7, reasoning that, since the loan will be refunded at the time that has been issued the order of the Court, the debtor has sufficient funds to pay a considerable part of its debt in a proceeding of Chapter 13. Allowing the petition of Chapter 7 to proceed in such circumstances would be an abuse of process, the Court emphasised.

Repayment of the loan is not a debt guaranteed

Allow a debtor under Chapter 7 means test deduct payments monthly average, facts of "guaranteed".However, the Ninth Circuit, in agreement with most jurisdictions, held that the obligation of the debtor to repay a loan from a retirement account is not a debt within the meaning of the bankruptcy code that can be deducted from income under proof of means.

Noting that the obligation of an employee under a loan of 401(k) is in itself, the Court emphasised that the administrator of the plan is not entitled to personal recovered against the debtor in case of default.The plan is not authorized to sue the debtor for payments, but only can offset against future benefits funds.The Court also underlined, distribution considers that emerges from a loan default, will be subject to the debtor only to tax penalties and does not provide the plan with reimbursement rights or other legal remedy.

The Court recognised that debtors in chapter 13 proceeding are expressly authorised to deduct refunds of 401(k) loans in the calculation of income available. However, the judge admonished, bankruptcy law makes no provision for a right comparable debtors of Chapter 7.

Repayment of the loan is not a necessary expense

As proof of means, debtors may deduct the actual monthly expenses that qualify as "other expense". the debtor has maintained that the monthly repayments of loan 401(k) are a necessary expense. According to the debtor, the recovery of his 401(k) account was necessary to his health and well-being because the account would its fine but significant retired.

Rejecting the claims of the debtor, the Court noted that the internal revenue manual and the Bankruptcy Code expressly declare that contributions to voluntary retirement plans are not a necessary expense. find the loan repayment 401(k) be the functional equivalent of voluntary contributions to a retirement plan, the Court concluded that the contributions can be deducted from the income as a necessary expense.

Rejecting the conclusions to the contrary, based on the application of the totality of circumstances proof of prior right, the Court explained that, under the currently applicable test means, voluntary retirement contributions per se are not a necessary expense. Therefore, allowing the debtor to deduct the repayment of loans 401(k) from his disposable income for purposes of proof means justify a presumption of abuse of relief of Chapter 7.

The presumption of abuse, Chapter 7 can be rebutted if "special circumstances," as a serious medical condition or a call or order to active military service, justify additional costs or an adjustment of the current monthly income, for which there is no reasonable alternative. However, the debtor's obligation to repay the loan, the Court has held, not (absent life altering circumstances beyond the General accident financial problems to failure) is a special circumstance sufficient to rebut the presumption of abuse.

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