Case Review: Voluntary Retirement Contributions and Retirement Loan Repayment found to be reasonably necessary expenses for Chapter 7 Debtor
I’d like to begin with wishing you a happy new year! I hope the holiday season was a healthy and enjoyable one for you. I absolutely love new years, with all its promise of starting a new and fresh in every aspect of life. I hope you have set great goals for yourself this year, and I look forward to reaching those goals with you.
In bankruptcy news, a nice, debtor-friendly case came out of the Bankruptcy Court for the Southern District of Indiana. The question presented: whether a debtor’s voluntary retirement contributions and retirement loan repayments are reasonably necessary expenses in a chapter 7 case. The answer according to this court: Yes!
When a person files a chapter 7 case, one of the tests the case undergoes is whether the case would be an abuse of the bankruptcy code. The trustee generally brings a motion to dismiss for abuse (where a debtor passes the means test) and must demonstrate either bad faith or that granting of a discharge would be an abuse of bankruptcy under the totality of circumstances. The totality of circumstances analysis is really a case-by-case, fact-intensive analysis.
In this case, the debtor is in her 50’s, works at a casino as a dealer, has had her hours and income reduced over the last couple of years, had about $28,000 in retirement, and owned no property of significant value. She had about $11,000.00 in predominantly credit card debt, as well as a deficiency debt of about $77,000.00 from a foreclosed home. According to her chapter 7 filing, she had monthly income of about $2,200.00, and adjusted expenses of about $2,475.00, leaving her in the negative every month. In her chapter 7 case, the US Trustee (“UST”) filed a motion to dismiss the debtor’s case for abuse. Particularly, the UST argued that if the debtor stopped the voluntary retirement contributions, and made some other changes to her lifestyle (which was already fairly modest, according to the court) she would have disposable income available. Particularly, the UST argued that if the debtor stopped making voluntary retirement contributions of about $230.00 per month, and stopped repaying a 401k loan of about $545.00 per month, she could fund a chapter 13 plan.
The court undertook a totality of circumstances analysis, looking at a number of factors. The court found that, in light of the debtor’s modest living, uncertain employment security, lack of retirement assets, and age, that the voluntary contributions and 401k loan repayment were reasonably necessary under the circumstances. In re Horn, 15-90240-BHL (Bankr. S. D. IN., Jan. 4, 2016).
The takeaway from this case is that chapter 7 debtors can and should allocate some of their budget to retirement building, especially if they haven’t done much retirement building in the past. There is some room to create a retirement blanket, even if you’re filing for bankruptcy.