Should You Borrow From Your 401 K Retirement Plan? Absolutely No

As well know and while working as a consumer bankruptcy attorney (, I had come across many clients who continuously withdrew from their 401K plan and now have totally emptied it. As we know, 401K is your retirement plan, and it should be kept for that purpose only. Withdrawing from your 401K Plan is the most fundamental mistake which many clients are making. Again, this 401 K is exempt assets and bankruptcy cannot liquidate or one has to surrender this asset to trustee. It is part of the exempt assets which a debtor can have. Again, bankruptcy may be the last resort but one should resist the temptation of borrowing from one’s 401 K plan. I hate to see these clients when they come to my office and had already exhausted their savings especially their 401 K Plan. Not only that they have borrowed from payday loans, and now have hefty liabilities to begin with.

The economy is tough and we are reaching a point of desperation and sometime a point of no return. But one should always seek qualified legal help, and we are here to help you. As you may know, we offer free consultation and sometime same day consultation. Call us at (702) 270-9100 if you have reached that point of desperation and making wrong decisions. You would not know it until you talk to someone with profound legal knowledge in this area. Don’t borrow you’re your Retirement Plan. I would rather you prefer to borrow from a payday loan than to borrow from your retirement plan.

Bankruptcy trustees, however, look at 401(k) loans in a different light. They see any allocation to repay a 401(k) loan (and sometimes any ongoing contribution to a 401(k) plan) as an unnecessary reduction of disposable income that would otherwise be available to pay creditors. 401(k) loan payments cannot be counted as allowable deductions in your means test calculations. And Chapter 7 and Chapter 13 trustees and/or creditors will often object if you include a 401(k) loan repayment allocation in your Schedule I and J budget in either a Chapter 7 or Chapter 13.
Let me give this citation here about:

No Means Test Deduction for 401(k) Loan Repayment
American Bankruptcy Institute Law Review Staff
Recently, in In re Egebjerg, the United States Court of Appeals for the Ninth Circuit dismissed, as abusive, a debtor’s chapter 7 petition because it found that the payments owed to the debtor’s 401(k) were not debt and thus, the debtor had excess disposable monthly income.[1] In 2004, the debtor borrowed money from his 401(k) to keep up with financial obligations and personal expenses. To repay the money owed to his 401(k), the debtor had his employer deduct $733.90 from his monthly paycheck. In 2006, the debtor had $31,000 in unsecured consumer debt and filed for chapter 7.[2]
Chapter 7 debtors must pass the “means test” to be entitled to relief under chapter 7.[3] The means test looks to debtors’ disposable monthly income to determine if they have enough money left each month to pay back a significant portion of their debt.[4] In In re Egebjerg, the debtor argued that his disposable monthly income was $15.31, after his employer deducted $733.90 per month to repay the debtor’s 401(k) loan.[5]

Section 707 provides that disposable monthly income is calculated by deducting “secured debt” and “necessary expenses” from monthly income.[6] The Ninth Circuit, aligning with the majority of circuits, reasoned that money owned on a 401(k) loan is not secured debt and thus could not be deducted from monthly income to calculate disposable income.[7] To be secured debt, there must be “liability on a claim,”[8] and someone must have a “right to repayment.”[9] When a debtor owes money to his or her retirement account, a debtor-creditor relationship does not exist because there is no liability on a claim or right to repayment; the money owed only reduces a debtor’s retirement savings.[10]
In addition, 401(k) loan repayments were not “necessary expenses” under the means test.[11] Courts look to the categories listed by the Internal Revenue Manual to determine what qualifies as a necessary expense.[12] Only expenses that fall under one of the listed categories can be deducted from monthly income in performing the means test.[13]
In some instances, a debtor that fails the means test can proceed under chapter 7 when there are “special circumstances.”[14] Although the majority of courts have held that repaying a retirement account loan is not a special circumstance,[15] the Ninth Circuit suggested that additional circumstances, such as a “life altering” event[16] or borrowing money for a serious medical condition, would be a special circumstance.[17] Here, the debtor did not demonstrate a special circumstance.[18]
Further, Congress did not intend for retirement loan repayments to be deducted under the means test.[19] When Congress amended the Bankruptcy Code in 2005, it was aware of case law that explained that retirement account loans were not considered debt. Notably, Congress did not expressly provide for retirement account loans to be considered debt.[20]
In the current economic climate, individuals continue to borrow money from their retirement savings to keep up with their creditors. However, chapter 7 proceeding are not meant to protect individuals from poor financial planning, specifically those who decide to borrow money from their retirement savings.[21] In 2005, BAPCPA was passed to promote personal accountability and prevent abuse of the bankruptcy system.[22] In re Egeberg demonstrates BAPCPA’s strict approach to determine if a debtor’s financial situation permits him or her to file for chapter 7 relief.[23]
[1] See Egebjerg v. Anderson (In re Egebjerg), 574 F.3d 1045, 1053 (9th Cir. 2009) (affirming, on direct appeal, decision of bankruptcy court).
[2] Id. at 1047.
[3] See 11 U.S.C. § 707 (b)(2)(A)(i) (2006).
[4] See In re Egebjerg, 574 F.3d at 1048.
[5] Id. at 1047.
[6] See 11 U.S.C. § 707 (b)(2)(A)(i)–(iii) (2006) (calculating disposable monthly income using precise mathematical formula).
[7] See In re Egebjerg, 574 F.3d at 1049; see also Eisen v. Thompson, 370 B.R. 762, 769 (N.D. Ohio 2007) (noting 401(k) is not secured debt and this is majority view); In re Esquivel, 239 B.R. 146, 152 (Bankr. E.D. Mich. 1999) (finding clear consensus loans from retirement accounts are not considered debt).
[8] 11 U.S.C. § 101(12) (2006).
[9] 11 U.S.C. § 101(5) (2006).
[10] See In re Egebjerg, 574 F.3d at 1049.
[11] Id. at 1051.
[12] See IRM (2009).
[13] 11 USC § 707 (b)(2)(A)(ii) (2006).
[14] See 11 USC § 707(b)(2)(B) (allowing presumption of abuse to be rebutted under special circumstances such as active military duty or serious medical condition).
[15] See In re Smith, 388 B.R. 885, 888 (Bankr. C.D. Ill. 2008) (determining repayment of retirement loan is not special circumstance absent other factors such as serious medical condition).
[16] Egebjerg v. Anderson (In re Egebjerg), 574 F.3d 1045, 1053 (9th Cir. 2009) (articulating special circumstances do not include poor financial planning).
[17] See 11 U.S.C. § 707(b)(2)(B)(i) (2006) (allowing debtor to rebut presumption of abuse in special circumstances).
[18] See In re Egebjerg, 574 F.3d at 1053.
[19] See In re Turner, 376 B.R. 370, 376 (Bankr. D.N.H. 2007).
[20] See Eisen v. Thompson, 370 B.R. 762, 771 (N.D. Ohio 2007).
[21] See In re Egebjerg, 574 F.3d at 1053.
[22] H.R. Rep. No. 109-31, at 4 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 91 (seeking to deter abusive and serial filings of bankruptcy).
[23] In re Egebjerg, 574 F.3d at 1048.


1 Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s