Loan repayments to a 401k plan cannot be used as a budget expense on the means test.
The Ninth Circuit Court of Appeals ruled today, in the case of In re Egebjerg, that 401k loans are not a debt as defined in the bankruptcy code and as such, the amount of any loan repayment cannot be considered in calculating a debtor’s budget/ability to repay his/her debts.
The basic rationale is that since a 401k loan is repaying funds to the owner of the 401k, it is not an actual debt, and the funds used to repay it are not a necessary living expense.
There are tax consequences for failure to repay a 401k loan, and these may be able to be argued as an offset, but the loan repayment itself cannot be used to determine eligibility to file a chapter 7 case.
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Mark,
Thanks for keeping the rest of us up to date!
I’ll put it on my blog (I’m an Arizona bankruptcy lawyer) but my readers won’t see it until tomorrow!
I’m also going to add your site to my blogroll and subscribe to your posts; this is a great site.
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