Egebjerg v. Anderson (In re Egebjerg)
Ninth Circuit Court of Appeals Case No. 08-55301
May 29, 2009
The Issue
In a case of first impression for the Ninth Circuit Court of Appeals, under BAPCPA's "means test" does a Chapter 7 "debtor's repayment of a 401(k) loan constitute a 'monthly payment on account of secured debts' or an '[o]ther [n]ecessary [e]xpense' that can be deducted from a debtor's monthly income for purposes of calculating the debtor's disposable monthly income under § 707(b)(2)"?
Under the facts of this case, if the 401(k) loan payments DO fit within either of these statutory terms, then the debtor's filing would not be presumptively abusive, and the Chapter 7 case would not be dismissed. Otherwise, the debtor would be left with sufficient monthly disposable income to make his filing presumptively abusive.
The Critical Facts
Two years before filing his Chapter 7, debtor took out a loan against his 401(k) plan to pay creditors, in an effort to avoid bankruptcy. The monthly payment was about $700; the loan was scheduled to be paid off 21 months after the date of filing. The debtor sought to include this payment as a necessary expense, the U.S. Trustee objected. Without this expense, debtor's filing was presumptively abusive under the means test.
Bankruptcy Court Ruling Below
The bankruptcy court held that the 401(k) loan was a "secured debt," and so appropriately deducted from disposable income, resulting in no presumption of abuse. However, since after the loan would be paid off there would be income available to pay a significant amount to unsecured creditors in a Chapter 13 case, the court determined that under the "totality of the circumstances" it would be an abuse to permit the case to stay in Chapter 7. Upon debtor's failure to convert to Chapter 13, the case was dismissed. Debtor appealed directly to the Ninth Circuit (see below about this appeal procedure).
The Ninth Circuit's Rulings and Rationale
1) "Secured Debts"
The debtor's monthly payments on a 401(k) loan are not permitted "monthly payments on account of secured debts" under § 707(b)(2)(A)(iii) because that type of loan is not a "debt" under the Bankruptcy Code, in that the 401(k) plan administrator has no "claim" for repayment against the debtor. Such a loan is merely an offset against future 401(k) benefits of the debtor.
2) "Other Necessary Expense"
The 401(k) loan payments do not fall within "the categories specified as Other Necessary Expenses issued by the Internal Revenue Service" under § 707(b)(2)(A)(ii) because these payments "are the functional equivalent of voluntary contributions to a retirement plan," which are expressly excluded under the IRS guidelines.
3) "Special Circumstances"
401(k) payments do not constitute "special circumstances" which would rebut the resulting presumption of abuse because such payments are "neither extraordinary nor rare."
Since the 401(k) loan payments are not payments on "secured debts" and are not "other necessary expenses," they may not be deducted from disposable income, resulting here in the presumption of abuse. And since these 401(k) payments do not qualify as a "special circumstance" rebutting that presumption, the Court affirmed the bankruptcy court's dismissal of the Chapter 7 case.
Note: Direct Appeal from Bankruptcy Court to Court of Appeals
28 U.S.C. § 158(d)(2), added by BAPCPA, provides for a direct appeal from the bankruptcy court to the circuit court. There are a variety of circumstances now permitting such direct appeals, but here debtor filed a notice of appeal, persuaded the bankruptcy court to certify that its decision involved a question of law for which where was no controlling precedent in the Ninth Circuit, and the motions panel of the Circuit granted the motion for direct appeal.
The Bottom Line
A 401(k) monthly loan payment cannot be included as an expense under the means test. And such a loan does not constitute an abuse presumption-defeating special circumstance if the loan was incurred for a commonplace reason such as "general financial problems." In dicta the Court kept open the possibility that if such a loan were incurred for some extraordinary reason, the payments could possibly qualify as an extraordinary circumstances overcoming the abuse presumption.
In a case of first impression for the Ninth Circuit Court of Appeals, under BAPCPA's "means test" does a Chapter 7 "debtor's repayment of a 401(k) loan constitute a 'monthly payment on account of secured debts' or an '[o]ther [n]ecessary [e]xpense' that can be deducted from a debtor's monthly income for purposes of calculating the debtor's disposable monthly income under § 707(b)(2)"?
Under the facts of this case, if the 401(k) loan payments DO fit within either of these statutory terms, then the debtor's filing would not be presumptively abusive, and the Chapter 7 case would not be dismissed. Otherwise, the debtor would be left with sufficient monthly disposable income to make his filing presumptively abusive.
The Critical Facts
Two years before filing his Chapter 7, debtor took out a loan against his 401(k) plan to pay creditors, in an effort to avoid bankruptcy. The monthly payment was about $700; the loan was scheduled to be paid off 21 months after the date of filing. The debtor sought to include this payment as a necessary expense, the U.S. Trustee objected. Without this expense, debtor's filing was presumptively abusive under the means test.
Bankruptcy Court Ruling Below
The bankruptcy court held that the 401(k) loan was a "secured debt," and so appropriately deducted from disposable income, resulting in no presumption of abuse. However, since after the loan would be paid off there would be income available to pay a significant amount to unsecured creditors in a Chapter 13 case, the court determined that under the "totality of the circumstances" it would be an abuse to permit the case to stay in Chapter 7. Upon debtor's failure to convert to Chapter 13, the case was dismissed. Debtor appealed directly to the Ninth Circuit (see below about this appeal procedure).
The Ninth Circuit's Rulings and Rationale
1) "Secured Debts"
The debtor's monthly payments on a 401(k) loan are not permitted "monthly payments on account of secured debts" under § 707(b)(2)(A)(iii) because that type of loan is not a "debt" under the Bankruptcy Code, in that the 401(k) plan administrator has no "claim" for repayment against the debtor. Such a loan is merely an offset against future 401(k) benefits of the debtor.
2) "Other Necessary Expense"
The 401(k) loan payments do not fall within "the categories specified as Other Necessary Expenses issued by the Internal Revenue Service" under § 707(b)(2)(A)(ii) because these payments "are the functional equivalent of voluntary contributions to a retirement plan," which are expressly excluded under the IRS guidelines.
3) "Special Circumstances"
401(k) payments do not constitute "special circumstances" which would rebut the resulting presumption of abuse because such payments are "neither extraordinary nor rare."
Since the 401(k) loan payments are not payments on "secured debts" and are not "other necessary expenses," they may not be deducted from disposable income, resulting here in the presumption of abuse. And since these 401(k) payments do not qualify as a "special circumstance" rebutting that presumption, the Court affirmed the bankruptcy court's dismissal of the Chapter 7 case.
Note: Direct Appeal from Bankruptcy Court to Court of Appeals
28 U.S.C. § 158(d)(2), added by BAPCPA, provides for a direct appeal from the bankruptcy court to the circuit court. There are a variety of circumstances now permitting such direct appeals, but here debtor filed a notice of appeal, persuaded the bankruptcy court to certify that its decision involved a question of law for which where was no controlling precedent in the Ninth Circuit, and the motions panel of the Circuit granted the motion for direct appeal.
The Bottom Line
A 401(k) monthly loan payment cannot be included as an expense under the means test. And such a loan does not constitute an abuse presumption-defeating special circumstance if the loan was incurred for a commonplace reason such as "general financial problems." In dicta the Court kept open the possibility that if such a loan were incurred for some extraordinary reason, the payments could possibly qualify as an extraordinary circumstances overcoming the abuse presumption.
New Litigation Reports on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.
by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Litigation Report and the entire contents of this website are NOT intended for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as legal advice to anyone.
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