Bankruptcy Appellate Panel Limits 401(k) Loan Deduction

April 1, 2008 ( - A 401(k) participant now seeking Chapter 13 bankruptcy protection may only deduct the balance she owes on two plan loans from her bankruptcy estate.

The 8 th Circuit U.S. Bankruptcy Appellate Panel ruled that Anne B. Lasowski could not average the current monthly payment over the life of the loans when determining the amount dedicated to her disposable income used to repay her unsecured creditors. Bankruptcy Judge Barry S. Schermer asserted in the ruling that Lasowski was limited to the actual loan repayment amount.

According to the court, Lasowski had a net monthly income of $352. Over 60 months, Lasowski would have $21,143 of excess income during the life of her bankruptcy reorganization plan, the court said. Lasowski owed six monthly payments of $50 for one 401(k) loan, for a total amount of $300, and 13 monthly payments of $100 for another loan, for a total of $1,300.

David Coop, the Chapter 13 trustee argued that Lasowski could only deduct $1,600 from the loans, which meant Lasowski had to pay her unsecured creditors $19,543. Lasowski contended she could deduct $9,000, which she calculated as the combined monthly payments of $150 multiplied by the 60 months of the loan.

Using that calculation, Lasowski argued she only had to pay her unsecured creditors $12,143, and that she could keep the extra $7,400. The U.S. Bankruptcy Court for the Eastern District of Arkansas agreed with Lasowski, and confirmed her plan.

Bankruptcy Code 1325 requires a debtor to pay all projected disposable income received during the life of a plan to his or her unsecured creditors.

According to the court, Section 1332(f) states that any amounts required to repay a Section 401(k) loan do not constitute disposable income under Section 1325. So, because only $1,600 is required to repay Lasowski’s loans, only $1,600 can be excluded from her excess income, the court said.

The court added that if Lasowski must pay $100 and $50 per month for her loans, she may continue to do so after the bankruptcy. Once the 401(k) loans have been repaid, Lasowski must redirect the funds used to pay those loans to the unsecured creditors, the court said.

The case is In re Lasowski,B.A.P. 8th Cir. No. 07-6063, 3/31/08.