Can I Deduct My Retirement Loan or Contribution on My Means Test?

04 Nov Can I Deduct My Retirement Loan or Contribution on My Means Test?

All above-the-median debtors must complete a “means test”.  Means test deductions are based on the IRS Standards.  The National or Local IRS Standards do not include a category for repayment of retirement loans or retirement contributions.  For Chapter 7 Debtors, however, there is a category (line 26) for “Other Necessary Expenses: mandatory payroll deductions”.  Line 26 includes the instruction “do not include discretionary amounts, such as non-mandatory 401(k) contributions”.

It seems clear that you can deduct retirement contributions if they are “mandatory”.  Mandatory contributions would include situations where the contribution is required as a condition of the job.  

But are retirement loans also mandatory?  You might think so because if you have such a loan you know that most 401(k) plans require loan payments to be made through payroll deduction, so you cannot simply stop paying it (unless you give up your job).    

Bankruptcy Courts have held that retirement loan payments, even if required to be payroll deducted are not “mandatory payroll deductions” as allowed on the means test.  Several Courts, however, have found that despite the fact that you cannot deduct the loan payment as a Necessary Expense, you may be able to deduct it as a “special circumstance” sufficient to rebut the presumption of abuse.

Some attempts have been made to classify the retirement loan as a secured debt (after all it is secured by the value of the retirement account).  Courts have held that retirement loans are not “debts” nor are they “secured debts” under the Bankruptcy Code, and are therefore not allowed to be deducted on the means test.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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