401(k) Loans and Abuse: Another BAPCPA Absurdity

29 Oct 401(k) Loans and Abuse: Another BAPCPA Absurdity

Applying the means test as written, a St. Louis judge dismissed a debtor who could not repay anything to creditors for a lengthy period of time…because she could hypothetically repay them something eventually. Once again, judges try to make sense of the means test and reach strange results.

In this particular case, a debtor with income over the median for Missouri passed the means test for filing Chapter 7. But she did so only by deducting for her voluntary contributions and loan repayments to her Thrift Savings Plan (a government equivalent to a 401(k)). Such deductions would be allowed in Chapter 13. They are not allowed expenses in Chapter 7.

The debtor, thinking logically, believed that if the point of the means test was to determine if a Chapter 13 would actually yield a meaningful amount (defined in the statute) to unsecured creditors then that’s how the analysis should look. Not so, concluded the court.

The court, sticking to the letter of the law, concluded the Chapter 7 means test does not allow you to include deductions in a real Chapter 13 but only in a hypothetical Chapter 13. In a real Chapter 13, the debtor would pay little or nothing for several years. But in a theoretical world where you didn’t apply all the Chapter 13 rules to a Chapter 13 case, a significant amount (the TSP contributions and loan repayment money) would be repaid to creditors.

To be precise, the court concluded the hypothetical Chapter 13 would work eventually.

Thus, the provisions governing Chapter 13 protects a debtor’s ability to repay a loan from her retirement account while at the same time requiring the debtor to devote the amount of that payment to her creditors if she pays the loan during the Chapter 13 commitment period.

One is left to ponder what creditors and the Chapter 13 trustee will think if a debtor proposes a five-year plan in which the first few years have a $0 payment while a 401(k) loan is be satisfied. Yet this seems to be what BAPCPA wrought.

Case: In re Mordis,#06-42590-293 (Bankr.E.D.Mo. 10/9/07)

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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 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com

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