June 25, 2018

401(k) Loan Repayments Not Allowed in Means Test Calculations

Evidence continues to mount that Chapter 7 will not be a friendly place for debtors who end up in the means test.   As you know, you can only qualify for Chapter 7 if (1) their household income falls below the average income for a similarly sized family in your State, or (2) if your household income exceeds the average income, but you pass the "means test." 

The means test sets out a budget using expense numbers that the IRS has deemed "reasonable."  If your actual expense for a particular category exceeds the IRS number, too bad.

For example, if the IRS budget says that a family of 4 in Fulton County, Georgia may spend $1,529 for housing and utilities.  If that family of 4 actually spends $2,000 for housing and utilities, they can only use the $1,529 in the housing/utilities column.  For bankruptcy calculation purposes, this family has $471 "left over" and available to pay creditors in a Chapter 13.

Now, we learn that 401(k) loan repayments cannot be included in a means test budget.  If you are paying back a 401(k) loan at $200 per month, for example, the Bankruptcy Court says that this $200 is actually "disposable" and available for creditors in a Chapter 13.  The Court does not care that if you defaulted on a 401(k) loan you would face tax problems and possibly lose your retirement investment.  Thanks to my colleague, attorney Bernd Stittleburg, who forwarded to me an email about the Lenton case from Pennsylvania and the Nockerts case from Wisconsin.

Bernd Stittleburg and I have both noticed that every Chapter 7 case that involves a means test inevitably results in an objection from the U.S. Trustee.  I am therefore much less inclined to pursue Chapter 7 relief for a debtor whose income exceeds the means test numbers, and if I do take a "means test" case, I have no choice but to charge a substantially higher fee. 

Congress created this means test to limit access to Chapter 7, and that goal is certainly being met.  Unfortunately, honest but unfortunate debtors now have very little place to turn since bankruptcy relief is become less and less available.

[tags] means test, 401(k) loan repayment in bankruptcy, median income test, Bernd Stittleburg [/tags]

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.


  1. Bob Delchin says:

    In the Northern District of Ohio in the case if In re Thompson, Judge Arthur I. Harris ruled that 401(k) loan repayments are deductible on a Ch 7 means test as payments on account of a secured debt. He also ruled that because the debtors pays $615 per month toward the loan repayment and that because it cannot be stopped, the debtors demonstrated “special circumstances” which rebutted the presumption of abuse even if the payments were not deductible from the means test. The UST appeal is currently pending.

  2. George Grahame says:

    I am confused. If Retirement loan plan repayments are nondischargeable wouldn’t they be deducted and thus not part of disposable income?

  3. George – very good question. The means test calculation does not have a category for retirement loan payments, so they cannot be deducted. As a result, your means test will show “disposable income” in the amount of your retirement loan payment even though that money is spoken for. That is why I say that Chapter 7 debtors who end up in the means test are in for trouble.

  4. PurpleIris says:

    We have a discharged chapter 7 case under the new laws in which we were allowed to deduct 401K loan re-payments, no questions asked. Our case was such that the US Trustee did audit our case, and we were asked no questions regarding this. It was a non-issue.

  5. can 401k loan payments be discharged in a chapter 7 bankruptcy?

  6. Luke Welmerink says:

    I am currently in the process of writing an article about this. If anyone has particular experience or would like to be interviewed about this topic, please feel free to let me know.

    I am arguing that prohibiting 401(k) loan repayments from being considered “necessary expenses” creates an insurmountable task in Chapter 7 for those petitioners whose monthly income is greater than the median in their state and do not qualify under one of the safe harbor provisions. The means test calculations precluding the deduction for 401(k) loan repayments is unnecessary because the court has other provisions under which they can dismiss the case, or convert it to Chapter 13, if they find that the petition was filed in “bad faith” or that the “totality of the circumstances” shows abuse. This inquiry into the facts and circumstances of a petition in the “totality of the circumstances” is sufficient to protect the rights of creditors and the discretion of the court while easing the burden for Chapter 7 petitioners.

    Any thoughts?

  7. @Bob Delchin: Do you have a cite for that case?

  8. I am looking at trying to file chapter 7, but with $1010 a month going out in 401k loans I cannot pass the means test to do so. If I could afford to quit my job and stop the 401k loan from coming out of my check I would but then I could not afford to live either. Please advise.

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