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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