Repayment of 401(k) Loan Isn’t a ‘Necessary Expense’

     (CN) – In a case of first impression, the 9th Circuit determined that the repayment of a retirement loan did not constitute “special circumstances” preventing a Chapter 7 petitioner from repaying his creditors.




     A three-judge panel affirmed dismissal of Scott Lee Egebjerg’s Chapter 7 petition, calling it “presumptively abusive” under the Bankruptcy Abuse Prevention and Consumer Protection Act.
     As a 27-year employee of a grocery store, Egebjerg grossed more than $6,000 a month. He also carried about $31,000 in unsecured debt.
     Two years before filing for bankruptcy, Egebjerg took out a 401(k) loan. His repayment plan automatically deducted $733.90 from his paycheck each month.
     Egebjerg included this amount in his “necessary expenses” when he filed for bankruptcy, listing his disposable monthly income as just $15.31.
     His trustee moved to dismiss the filing, calling it “presumptively abusive” of the “means test” under bankruptcy law, which is used to gauge a debtor’s ability to repay his debts.
     The bankruptcy court denied the motion and declared the 401(k) loan a “secured debt” that could be deducted from income. However, the court dismissed his overall petition on the basis that Egebjerg could repay most of his debts in a Chapter 13 filing.
     Judge Hawkins of the San Francisco-based appeals court held that Egebjerg had not demonstrated that “special circumstances” prevented him from repaying his debts.
     “It appears that borrowing from a 401(k) is not an uncommon approach for many debtors,” Hawkins wrote, noting that a retirement loan usually stems from a debtor’s inability to pay his bills.
     “Indeed, if the original unsecured consumer obligation could not be considered a special circumstance, it would seem problematic to find ‘special circumstances’ for the 401(k) loan that merely replaced those debts.”

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