Bankruptcy Court Disallows Retirement Loan Repayment Expenses and Dismisses Chapter 7

Bankruptcy Court Disallows Retirement Loan Repayment Expenses and Dismisses Chapter 7

On May 23, 2019, the Bankruptcy Court for the District of New Jersey granted the United States Trustee’s (UST) motion to dismiss.

At filing the Debtor had approximately $53,000.00 in credit card debt in large part from gambling. She also had about $50,300.00 total in three pension loans. The monthly payment on the pension loans was $1,063.09, about 15% of her salary. These amounts were automatically deducted from her paycheck and upon default would be reported as income. There was no evidence that a default would result in loss of employment. Debtor’s income is above median but her Form 122A-2 indicates a negative amount.

The UST filed a motion to dismiss pursuant to 11 U.S.C. § 707(b)(3)(B) based on the totality of the circumstances of Debtor’s financial situation. The dismissal was based on several issues. First, the UST argued that the Debtor had incorrectly calculated her income and expenses based mainly on the large tax refunds she regularly receives (which were not added back into her income). Second, and crucially for this case, the UST argued that Debtor’s pension loan repayments were not “mandatory” contributions that prevented repayment of creditors. If they were applied to repayment, then the creditors could receive significant repayment.

The Debtor argued that these repayments would be specifically allowed by the Bankruptcy Code if she was forced to file a chapter 13 bankruptcy. Therefore, in a chapter 13 she would not be able to fund a plan. 11 U.S.C. § 1322(f) provides that “[a] plan may not materially alter the terms of a loan described in section 362(b)(19) and any amounts required to repay such loan shall not constitute ‘disposable income’ under section 1325.” 11 U.S.C. § 362(b)(19), relates to retirement loans. Furthermore, 11 U.S.C. § 541(b)(7), excludes contributions to a qualified retirement account from the definition of “property of the estate.”

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