A River Runs Through The Looking Glass Into The Means Test

21 Mar A River Runs Through The Looking Glass Into The Means Test

The Southern District Bankruptcy Court of Illinois sits along the east bank of the Mighty Mississippi River from a spot just north of St. Louis, Missouri to the southern most point in Illinois. Across the river and far across the state of Missouri is the Western District Bankruptcy Court of Missouri. Geography aside, the Means Test is Congress’ version of a Charles Lutwidge Dodgson Alice in Wonderland method of determining how much, if anything, a debtor has to pay creditors in bankruptcy. Two districts, one bankruptcy law, or so it seems.

The Means Test calculates current monthly income and subtracts amounts reasonably necessary to be expended, so says the definition. Like navigating the rabbit hole, calculating current monthly income is a daunting task. Look at income, whatever that is, received on a regular basis during the previous six months before filing bankruptcy; divide that amount by six and call it current. Courts fare no differently than Alice in this literary nonsense.

On the Illinois side of the Mississippi River, a debtor who withdraws money from a 401k plan or other tax-deferred retirement account does not count that money as income for purposes of determining how much that debtor is capable of paying creditors. According to In re Zittel, No. 07-31616 (Bankr. S.D.Il. March 20, 2008), voluntary withdrawals from a 401k account do not constitute income for purposes of the Means Test. The Zittel Court decided that 401k contributions were income at the time they were received by debtor and placed into the retirement account. Those funds do not reoccur as income upon withdrawal.

Two previous decisions, both from across the river in far western Missouri, decided the question differently. In the Missouri cases of In re Sanchez, No. 06-40886, and In re Zahn, No. 06-40865, both found at 2006 WL 2038616 (Bankr. W.D.Mo. Jul 13, 2006), debtors attempted to exclude money withdrawn from 401k plans from the calculation of income. The Missouri Court decided both cases jointly and ruled that money deposited into a 401k plan was not received “for use” by the debtor or taxed as income by the government until it was withdrawn. Although the court accepted the fact that the income was received, the Court distinguished the income as “deferred” due to being deposited into the 401k account.

A theory of judicial decision-making says the first case to decide an issue is wrong, more often than not. Later courts have the advantage of viewing both the issue and also of reviewing the logic of the prior decision. Here, true to theory, the latter court got it right.

The Illinois Court noted that Sanchez and Zahn mistakenly believed money deposited into a 401k account was not taxed until withdrawn. The Zittel Court pointed out that such money is deferred from federal income tax, but not social security, Medicare and unemployment taxes. Regardless, the Illinois Court did not decide the question by taxation. Bankruptcy Code Section 101(10A) indicates that income is not to be determined on the basis of whether it is taxable. The Illinois Court reasoned that the money was received, and placed into a retirement account at the direction of debtor Zittel, and was at all times under the control of the debtor, as surely as if the money was on deposit in a checking or savings account.

I call this “other pocket money”. For example, debtor receives some money when it is earned. Debtor chooses to put that money in a location. The location could be a bank account, an investment, or in the right pants pocket. If the debtor takes the money out of the bank, cashes in the investment, or moves the money from the right pocket to the left pocket, it does not change at anytime from being debtor’s money. Nor does it become income. It is still the same money that debtor had on deposit, or invested or in the other pocket, no more no less, and it should not be counted as income. It just moves from one pocket to the other pocket.

On the west bank of the Big Muddy, like a smiling Cheshire Cat, sits the Eastern District Bankruptcy Court of Missouri, waiting for a case on this issue.

Related Posts Plugin for WordPress, Blogger...
The following two tabs change content below.

Andy Miofsky, Esq.

Andy Miofsky holds the highest AV PREEMINENT rating from Martindale Hubbell Law Directory and a perfect 10.0 from AVVO. Andy is an Illinois consumer rights lawyer with offices in Granite City Illinois. Andy represents people with bankruptcy and student loan debt problems throughout the Southern District of Illinois since 1979.

Sorry, the comment form is closed at this time.