Friday, December 21, 2007

Update on Deductibility of 401k Loan Payments Under Means Test

This blog previously reported on Judge Larry Kelly's decision in In re Otero which allowed payments on 401k loans to be deducted under the chapter 7 means test. That decision was subsequently reversed on appeal by the U.S. District Court. McVay vs. Otero, 371 B.R. 190 (W.D. Tex. 4/26/07). The District Court looked at the same language as Judge Kelly and concluded that a loan against a 401k plan was NOT a debt, so that it could not be a secured debt deductible under the means test. In making this ruling,the District Court followed the majority position.

The Debtors did not further appeal the District Court ruling. Instead,they converted to Chapter 13 and proposed a plan which allowed them to deduct the 401k payments from disposable income. The Debtor's plan was confirmed on November 19, 2007. Under the confirmed plan, the Debtors will pay $99 a month for 36 months and unsecured creditors will receive approximately 3% on their claims. Thus, while the U.S. Trustee was successful in its legal argument, the practical effect to creditors in the specific case appears to be negligible.

This is a subject which merits further discussion. The majority position followed by the District Court seems to be inconsistent with the treatment of 401k loans elsewhere under BAPCPA. Under Sec. 523(a)(18), a debt owed to a 401k plan is not dischargeable. Similarly, Sec. 362(b)(19) has an exception to the automatic stay relating to a "loan" from a tax qualified retirement plan. If Congress considered a loan owed to a 401k plan to be a "debt" for purposes of Sec. 523(a)(18) and created an exception for payments on a "loan" under Sec. 362(b)(19), why would payments owed to a tax qualified retirement plan not be considered to be debts under the means test? This seems to be a case where the majority has the weaker side of the argument.

1 comment:

Dawn C. said...

The US Trustee here in the Middle District of PA takes the same position - that 401(k) loan payments cannot be deducted from the chapter 7 means test. I have a case now with a client who would have zero disposible income in a chapter 13 as ar esult of the loan payment and qualified contributions but she is either going to have to fight the US Trustee, or she is going to need to file a nominal plan in a 13.