Bankruptcy Judge OKs K Plan Loan Exemption

August 27, 2004 ( - A long-time employee of an agricultural equipment manufacturer can exempt nearly $40,000 from his bankruptcy estate representing a K plan loan he took and then repaid before filing for bankruptcy protection, a judge ruled.

US Bankruptcy Judge Thomas Perkins of the Central District of Illinois rejected claims by the bankruptcy trustee in the case involving James and Sandra Dunbar that the couple repaid the K plan loan to fraudulently hide the assets from their creditors. James Dunbar worked for Case New Holland and participated in its K plan, according to Perkins’ ruling.

After taking the $39,800 loan in May 2001, James Dunbar made periodic payments and in June 2001, he repaid the loan in full. Dunbar and his wife filed their bankruptcy petition four months later and listed his 401(k) plan as being exempted from the reach of his creditors. Bankruptcy trustee Richard Barber, who represents the Dunbars’ creditors, objected in part to the exemption as being fraudulent.

But the court found that even if an asset transfer occurred as laid out in bankruptcy law by way of the loan repayment, the transfer was not fraudulent because James Dunbar did not receive less than the “reasonably equivalent value” in exchange for repaying the loan.

“This case does not merely involve the conversion of a nonexempt asset into an exempt asset, but rather the reconversion of an exempt asset,” Perkins wrote. “Viewing the withdrawal and repayment as parts of a broader transaction, when [the participant] elected to repay the monies, the status quo ante was restored and no harm resulted to innocent creditors.”

 A copy of the case, Barber v. Dunbar (In re Dunbar), Bankr. C.D. Ill., No. 01-84333, 8/19/04, is available  here .