The dreaded UST's Statement of Presumed Abuse

[getouttadebt]

SUB, good find. I bet this will pose a problem for me. Will update this when I find out.

getouttadebt

[diviaruba]

Yeah, I know the 401k money is protected, but my question was more like this -- can the UST look at ongoing deductions as money he could claim for the creditors? Since participation in my 401k is "voluntary" -- could they force me to withdraw from the plan and then show money left over to force me into Ch 13? I am quite sure they can't touch the funds already sitting in the 401k plan, but a portion of my payroll goes direct to 401k each pay period.

Anyone have any other input on this?

Thanks,
getouttadebt

That is likely to be a problem. Several cases have argued that because retirement contributions are specifically allowed under Chapter 13 (amounts not includable in disposable income) that the same provisions apply under Chapter 7. Not so, say most of the decisions. Here's one for starters:

http://www.moeb.uscourts.gov/opin_search/pdfs/0642590_BK_01_mordis.pdf

The statute excluding 401K contributions is 11 USC 1322 (f), but has been generally viewed as applying only to Chapter 13 debtors, and not those filing under Chapter 7.

[diviaruba]

There is, however, a thin thread of hope on this issue. In Mokri, the Judge said that had the petition been filed originally as a Chapter 13, the 401K contribution would not be considered disposable income, and therefore denied the U.S. Trustee's 707(b)(3) petition for abuse:

http://www.rib.uscourts.gov/D/2007/all/Mokri%20707(b).pdf

An even quirkier case is Skvorecz, in which the Judge decided that if the debtor was forced to convert to a Chapter 13, he could then invoke the provisions of 1322(f) and have zero disposable income available to pay his creditors, leading to an absurd result, saying:

"If the Court were to dismiss the case pursuant to section 707(b), the Debtor could refile his case under Chapter 13 and unsecured creditors would be paid nothing based upon provisions of sections 1322(f) and 1325 and the deference accorded by Congress to 401(k) contributions and loan repayments. Alternatively, if the Court were to convert the case to Chapter 13, “with the Debtor’s consent,” the same result would obtain. If part of the intent of Congress in tying Chapter 7 relief to a means test, was to require a debtor to repay his creditors if he is able to, then it would be nonsensical that the very payments or expenses which tip the calculation so as to create the presumption of abuse, an indication of an ability to repay, are the same payments or expenses that are excepted from “disposable income” in a Chapter 13."

http://www.cob.uscourts.gov/opinions/06-12278order.pdf

This case has not been cited anywhere that I have found, and may be idiosynchratic to the Colorado district.

[HHM]

HHM, appreciate your insight here. I have read many of your posts, and I know you have a ton of knowledge which is why you are a moderator, I assume. Follow up question -- I do participate in my company's 401(k) program and I have about $1200 per month Pre-Tax deducted from my payroll. This is just what it is -- retirement savings account and I am only 41. But because it is "voluntary" do you think this could cause a problem? It's really not an expense though since it is Pre-Tax and comes right out of my payroll. Thanks for any insight.

getouttdebt

I can almost guarantee that is the issue (and it doesn't help that you are over the median). Some others have already posted on the issue, but man, that is a lot to be contributing and I am not surprised that the US trustee filed their abuse motion.

Did your attorney even talk to you about the 401k contribution?

What percent of your gross monthly income does that represent? And what is your companies matching policy?

The US trustee is probably viewing it as an over-contribution. In chapter 7, you really are only allowed "living expenses" and retirement contributions simply do not fall into that category. Debtor's can usually "get away with" contributing up to their companies matching percent, but anything beyond that will almost certainly motivate a "presumed abuse" claim.

[SUB]

Did your attorney even talk to you about the 401k contribution?

That's the first thing I thought of too. Either it was overlooked, or the attorney must have thought it would fly. Even if the contribution was applied to "living expenses", it's possible to still be negative. Right?

[SUB]

I think I'm in love with this judge. Hope it's a girl.

[HHM]

I just noticed, lets back up for a second....

Section 1322(f) relates to 401K Loan Repayments, not 401K contribution.

The statute that covers 401K contribution is 541(b)(7), but it cross references so much other crap, who knows what it really says

[diviaruba]

I just noticed, lets back up for a second....

Section 1322(f) relates to 401K Loan Repayments, not 401K contribution.

The statute that covers 401K contribution is 541(b)(7)

My bad. These frequently show up together in cases where the debtor has a loan outstanding as well as ongoing contributions. I stand corrected.

[getouttadebt]

Thanks everyone -- there are some excellent pieces of information here. I will update once I talk to my attorney.

getouttadebt

[diviaruba]

I think I'm in love with this judge. Hope it's a girl.

Sorry, but his name is "Bruce"

[getouttadebt]

My company matches 50% of the first 4%. I do contribute a high percentage -- 13%. The main reason is because up to this point I have had no 401k savings and I need to catch up for lost time. That said, my attorney never thought that would be an issue. At my 341 the local trustee asked if my contribution was a loan payback or voluntary contribution. Again, this is pre-tax dollars, so if they make me withdraw from the plan altogher then there would be disposable income -- but far less than what I contribute because taxes kill me.

Thanks, HHM, for sharing your knowledge on this topic.

getouttadebt

[diviaruba]

Net after-tax would probably still be north of $700/mo. Do you have a negative means test number that could handle that increase to disposable income and stay in a 7?

[getouttadebt]

It is negative -- I just don't know how much. Will have to check the paperwork.

getouttadebt

[HHM]

I don't know what is in your petition or what the trustee's motion really said, for all I know you have a $900 per month lease payment on a Mercedes, and that could be the problem.

But based on what has been shared so far, It looks like the culprit is an "over-contribution" to the 401K. If your contribution was at 4% (up to the companies matching percent), I don't think the trustee would be squawking about the 401k (but of course, you probably would have disposable income at that point )

Thus, the trustee would probably make some argument along the lines that, yes, 401K contributions are not used to calculate disposable income, but that there is an upper limit and a good faith requirement and that a chapter 7 filing with a "high" 401K contribution is a bad faith filing and the debtor does have disposable income.

Plus, all the US trustee needs to do is get at least $100 per month in disposable income to get you into a chapter 13.

In any event, I hope you come back and let us know how it turns out.

[SUB]

Sorry, but his name is "Bruce"

Then we're halfway there, I think I'm going for it. It feels soooo right.