Unsecured debt limit

[moses911]

I was always wondering from reading all info online how this figure is calculated.

unsecured debt limit as of April 2016 is 394000

Example:

Let us assume that someone owes

200k credit cards
100k medical bills

then he owes 50k car loan which he will pay outside chapter 13
then he owes 50k for 401k loan which he pays outside chapter 13 plan payment

how the trustee calculate the debt limit?

a) the trustee will consider that the person have 400k unsecured debt which is over 394k?

b) the trustee will consider that the person have 200k unsecured debt which is less than 394k?

[moses911]

Any idea?

[Vandervecken]

Well, I'm not an expert (I'm going through a 7) but I would think it's something like this:

• The credit cards and medical bills come to $300k of unsecured debt.
• The auto loan is a secured debt, assuming that there is a perfected lien on the title. It's not unsecured debt, so it is not included in the $394k.
• The 401(k) loan is a loan to yourself. You are correct that the payment is taken out before DMI is calculated for determining your C13 payment. I'm not sure if it is lumped into teh $394k bucket or not.

Hopefully one of the real experts will chime in. They're busy people, so sometimes replies take a day or two. I understand how hard it is to be patient!

[LadyInTheRed]

I am pretty sure the 401k loan would not be considered debt. The following is from a 9th Circuit Court of Appeals opinion in the EGEBJERG case. The issue in that case was whether payments on a 401(k) loan could be deducted when determining disposable income, but it seams that the definition of "debt" would apply to all bankruptcy issues.

[3] We join the vast majority of courts in holding that the debtor’s obligation to repay a loan from his or her retirement account is not a “debt” under the Bankruptcy Code. See, e.g., In re Villarie, 648 F.2d 810 (2d Cir. 1981) (loan drawn on employee’s contributions to retirement system not a “debt” because plan has no right to sue a member for the amount of the advance, it is simply offset against future benefits); Bolen v. Adams, 2009 WL 605270, *3 (N.D. Miss. 2009) (vast majority of courts have held a debtor’s obligation to repay retirement account loan is not a “debt” under the Code); Eisen v. Thompson, 370 B.R. 762, 769 (N.D. Ohio 2007) (majority view is that retirement plans loans are not secured debts); In re Esquivel, 239 B.R. 146, 152 (Bankr. E.D. Mich. 1999) (“clear consensus” that borrowing from retirement account does not give rise to either secured or unsecured “claim” under the Bankruptcy Code); see also McVay v. Otero, 371 B.R. 190, 195 (W.D. Tex. 2007); In re Fulton, 211 B.R. 247, 264 (Bankr. S.D. Ohio 1997); In re Scott, 142 B.R. 126, 131- 32 (Bankr. E.D. Va. 1992); In re Jones, 138 B.R. 536, 537-38 (Bankr. S.D. Ohio 1991).

The reasoning behind these decisions is straightforward. Egebjerg’s obligation is essentially a debt to himself — he has borrowed his own money. In re Smith, 388 B.R. 885, 887 (Bankr. C.D. Ill. 2008); see also McVay, 371 B.R. at 197 (collecting cases). Egebjerg contributed the money to the account 6386 IN RE EGEBJERG in the first place; should he fail to repay himself, the administrator has no personal recourse against him. In re Villarie, 648 F.2d at 812. Instead, the plan will deem the outstanding loan balance to be a distribution of funds, thereby reducing the amount available to Egebjerg from his account in the future. [ER 317, § 18.3] See In re Mowris, 384 B.R. 235, 238 (Bankr. W.D. Mo. 2008); see also Mullen v. United States, 696 F.2d 470, 472 (6th Cir. 1983). This deemed distribution will have tax consequences to Egebjerg, but it does not create a debtorcreditor relationship. In re Smith, 388 B.R. at 888 (“Nonpayment comes with liability for income taxes and penalties, but nonpayment is a valid, lawful alternative.”).

As succinctly explained by one district court:

"Retirement plan loans are qualitatively different than secured debts such as home mortgages and car loans. The retirement plan administrator does not loan the plan participant the administrator’s money. It simply deducts the requested loan amount from the participant’s own account, and credits the loan payments and interest back to the participant’s account. If the participant defaults on the loan, the plan administrator deducts the amount owed from the vested account balance, and repays the loan with this deduction. The participant must treat this deduction as a distribution which is taxable as income to the participant in the default year. The participant may also be subject to an early withdrawal penalty. But, the plan administrator has no right to payment under the Bankruptcy Code"

Thompson, 370 B.R. at 768 n.10.

http://cdn.ca9.uscourts.gov/datastor...9/08-55301.pdf

I agree with Vandervecken that in your example, assuming the car loan is properly secured, that person has $300,000 in unsecured debt.

[moses911]

Thanks both for your reply. So basically regardless if you pay some of your creditors outside of bankruptcy the court will still add that debt to the total debt allowed.