The U.S. Court of Appeals for the Ninth Circuit recently affirmed a bankruptcy court’s decision to dismiss a chapter 7 case pursuant to §707(b)(3) in In re Egebjerg.[1] The bankruptcy court concluded that the debtor’s loan from his §401(k) plan was a secured loan, repayment of which can be expensed pursuant to §707(b)(2)(A)(iii). Nevertheless, the court found that the debtor could pay a significant portion of his debts after the loan was repaid, finding the case abusive under §707(b)(3).
The Ninth Circuit agreed. The debtor’s filing of his petition was presumptively abusive because the expensing of the repayment of a loan from a 401(k) plan was not a monthly payment for a secured debt pursuant to §707(b)(2)(A)(iii), nor an other necessary expense pursuant to §707(b)(2)(A)(ii)(I).
The Ninth Circuit sided with the vast majority of courts, particularly pre-BAPCPA rulings,[2] that find that a 401(k) loan obligation is not a debt as the term is defined by the Code. Nor did Congress effect any change to the definitions in enacting BAPCPA. The court equated “debt” with “claim” based on definitions found in the Code.[3] Furthermore, the obligation arising from a 401(k) loan is to the retirement plan participant, i.e., the debtor, rather than to any other party. Consequently, the loan is not a debt within §707(b)(2)(A)(iii).
Because Congress acts intentionally when omitting statutory language that it has included elsewhere, chapter 13 debtors’ right to expense 401(k) loan payments in projected disposable income is specifically preserved in §1322(f). In addition, the automatic stay does not bar an automatic payroll deduction for such a payment.[4] Finally, the court found its reasoning consistent with Congress’s intent to divert many would-be chapter 7 debtors into chapter 13.
The court also found that a 401(k) loan repayment was not an “other necessary expense” as permitted by §707(b)(2)(A)(ii)(I). Relying on the Internal Revenue Service’s guidelines, which are expressly incorporated into the Code by Congress, the court found that such an expense was not necessary but voluntary.[5] The court described a debt repayment as functionally equivalent to a voluntary retirement plan contribution, which the IRS determined to not be deductible as an other necessary expense.
The Ninth Circuit rejected the bankruptcy court’s holding that a 401(k) loan repayment might qualify as a special circumstance that could rebut the presumption of abuse.[6] The Code’s examples of such circumstances shared a feature that occurred beyond the control of the debtor. The Ninth Circuit acknowledged that, while a debtor’s resort to borrowing from his retirement plan might arise under special circumstances, justifying a special-circumstances loan repayment expense, the debtor here had made no such showing.
2. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
3. See 11 U.S.C. §§101(5) and (101)(12).
4. See 11 U.S.C. §362(b)(19).
5. These guidelines are found in the IRS’s Internal Revenue Manual. Importantly, the court’s reliance on these guidelines arguably determines the permissibility of many other expenses comprising the means-test regime including, e.g., transportation ownership expense when a debtor is under no obligation to make a vehicle loan or lease payment, or an additional operating expense ($200) for a debtor’s older or high-mileage vehicle.
6. See 11 U.S.C. §707(b)(2)(B).