Wednesday, January 8, 2014

The Deductibility of Retirement Plan Loan Repayment in Chapter 7 and Chapter 13

The court in In re Mowris, 2008 WL 799848 (Bkrtcy. W.D. Mo., Judge Federman) dealt with the issue in this chapter 7 case, whether the involved retirement account loans were deductible "debts" for purposes of the means test.

The court held that a loan against a qualified retirement account is not a "debt" under the Bankruptcy Code. Therefore, such loans are not secured debts that are deductible from current monthly income under the means test as "payments on account of secured debts." Moreover, the repayment of loans taken from their retirement accounts did not provide for the chapter 7 debtors' health and welfare, and was not for the production of income. Accordingly, the repayments did not qualify as unenumerated "other necessary expenses" that could be deducted from the chapter 7 debtors' current monthly income under the means test. In re Mowris, 2008 WL 799848 (Bkrtcy. W.D.Mo., Judge Federman).

In contrast to the above case under chapter 7, the court in In re Lasowski,(8th Cir.BAP (Ark.) held that a debtor may in calculating "disposable income" deduct actual amounts needed to repay 401(k) loans. But the court noted that in in calculating his "disposable income," an above-median-income chapter 13 debtor could only deduct the actual amounts necessary to repay her 401(k) loans, not the current monthly payment multiplied by the life of the plan. The court further held that once these loans were satisfied, the debtor was required to redirect his additional monthly income, which previously would have been used to repay the loans, to unsecured creditors. He could not keep this additional monthly income for himself.  The court stated that this result was supported by the plain language of the Bankruptcy Code and by the purpose of BAPCPA's amendments to 707(b) and 1325(b), which was to require above- median-income debtors to make more funds available to unsecured creditors.

The BAP court held that the courts which have reached a different result have confused the 707(b) formula with the provisions of 1322 which exclude from disposable income amounts necessary to repay 401(k) loans and prohibit material alterations to a 401(k) loan. The BAP stated that this
added to the confusion that arises when the 401(k) loan repayment amount is expressed as a monthly figure for the length of the plan.