Alice in Wonderland: 401(k) Withdrawals as Income?

21 Mar Alice in Wonderland: 401(k) Withdrawals as Income?

Do 401(k) withdrawals during the prior six-months before a bankruptcy filing “count” as income for the means test? My friend Andy Miofsky outlined today the well-reasoned Zittel decision from Southern Illinois that concludes they do not.

The decision was set in opposition to In re Sanchez from my neighboring district, the Western District of Missouri, which concluded that 401(k) withdrawals do count as “income.” This 2006 decision, taken in concert with the more recent, even more draconian In re Riding which concluded that unusual and non-repeating spikes in income during the six-months prior to a Chapter 13 filing cannot be ignored as a “special circumstance” — but would still be excludable in a Chapter 7 case — lay bare some of the absurdities in the drafting and, as night follows day, the interpretations of BAPCPA.

Assume we have a laid off worker facing foreclosure withdraws a large sum from a 401(k) plan just prior to filing bankruptcy to catch-up the mortgage. All of the 401(k) withdrawal would be imputed as continuing income — if he files Chapter 13 and attempts to repay creditors — thereby likely rendering the payment so high that it is unaffordable. His attempt to repay creditors would fail. But if he filed Chapter 7 and sought to simply wipe out creditors without any repayment, that might well be successful.

And the creditors wanted this law, right?

As Andy pointed out, the Sanchez court did not have access to the give-and-take of debate that comes from an issue developing in other courts first. The judge was forced to deal with an issue brought to him on a clean slate. And it does not appear that it was particularly well-developed by any of the parties.

In hindsight, it is hard to imagine many courts will follow the Sanchez reasoning in light of Zittel and Wayman. Indeed, it is a little hard to imagine Judge Venters, who ruled in Sanchez, reaching the same conclusion if given the opportunity to revisit it. The only solid basis for treating a 401(k) withdrawal as “income” for the means test is that it is taxed as income by the IRS, a reason specifically excluded from consideration by the bankruptcy law. It also creates the absurd possibility of a debtor being subject to “double-dipping” if she withdraws money that was contributed to the retirement plan within the 6-month CMI period. That alone should give any future judge pause in considering the issue.

So far — fingers crossed — in the Eastern District of Missouri, our litigants have not seen fit to press the issue to finality and consumers are not burdened with the legacy of Sanchez. There is indeed merit in waiting and watching the law evolve before jumping in with both feet.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:

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