Repayments Of Retirement Plan Loans As Means Test Expense

Many bankruptcy debtor have borrowed money from their retirement plans in an attempt to pay their monthly debt obligations and avoid bankruptcy. The retirement loans require repayment within a certain time in order to avoid income taxation including penalties. When those debtors do file bankruptcy they often suggest that their required loan repayments to their retirement plan be considered as necessary expenses when they calculate their means test eligibility. 

Florida bankruptcy courts allow Chapter 7 debtors to deduct from income all expenses which are reasonably necessary for the support and maintenance of the debtor and family. Payments to the debtor’s own retirement accounts are essentially payments to the debtor himself. Courts have stated that payments or contributions to financial account for the debtor’s own future benefit are not reasonably necessary for the maintenance and support of the debtor and dependants. 

Therefore, if you have borrowed money from your retirement to avoid bankruptcy you cannot deduct loan repayments in your qualification for a subsequent Chapter 7. Although it is morally laudable to use all your financial resources to pay your debts and avoid bankruptcy, my general advice to debtors is that they neither spend nor borrow retirement money to pay their unsecured creditors unless you are sure that using retirement money will solve your debt problems.  

Comments

[Russ DeMott]

Good post. The irony is that those retirement account payments ARE counted on the means test in 13, which creates a bit of a paradox.

If the facts were right, the 7 means test could show abuse (for example showing the debtor could pay $210 per month to unsecureds) and in 13 show a negative number to unsecureds (for example if the debtor had $300/month over 5 years going to repay a 401(k) loan).

This is yet another problem with the means test.