(Part 2)

But what about the ending of repayments of loans from debtor’s 401(k) retirement accounts? Trustee will naturally argue for “step up” payments on the plan because a 401(k) loan repayment is actually debtor paying himself back for a loan from himself. Did debtor not just pay himself back at the expense of his creditors? These are valid arguments because instead of paying his creditors, debtor actually gave himself priority and paid himself back. Money that could have been paid to his creditor went to pay back the debtor himself. This seems to be unfair on its face.

In Re Egan, a recent Pennsylvania case, the Chapter 13 debtors had current monthly income of $8,455.76 and disposable income of $514.07. The debtors’ proposed plan called for monthly payments of $514.07 for 60 months. Debtors had total unsecured claims of $83,135. Thus, debtors proposed to pay about $30,000 out of $83,000 unsecured debt or about 37%. Debtors attempted to avoid filing for bankruptcy by taking out three loans from their 401(k). All three loans were to be repaid during the life of the plan. But they intended to increase their 401(k) contributions when the loan repayments ended. So, the trustee said “Whoa, you can’t do that, not in my part of the woods!” Naturally, trustee asked for “step up” payments on the plan instead of allowing debtors to resume 401(k) contributions after loan repayments ended.

Surprise! The court sided with debtors and allowed debtors to resume 401(k) contributions instead of increasing plan payments.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.