A decision by the Bankruptcy Court in the District of South Carolina reinforces the premise that while 401K loan repayments are excludable from disposable income under § 1322(f), the exclusion ends with the last loan payment and a step plan is required if the loan ends before the plan term. See, In re Anstett, 383 B.R.380 (Bankr. D.S.C. 2008). In Anstett, the above median income debtor deducted two 401K loans and a 401K contribution. One loan totaled $440 per month and paid out 18 months into the 60 month plan. The debtor’s plan called for a 1% payment to his unsecured creditors ($300), and did not increase when the 401K loan ended.
The trustee objected to the debtor’s plan asserting two arguments: 1. it violates the specific terms of § 1322(f) to continue to deduct 401K loan payments after the loan is repaid because that section only excludes “amounts required to repay the loan” from disposable income, citing In re Nowlin, 366 B.R. 670, 674 (Bankr. S.D.T. 2007) and In re Novak, 379 B.R. 908, 911 (Bankr. D. Neb 2007); and (2) a plan is not proposed in good faith under § 1325(a)(3) when a debtor is allowed to keep income no longer needed to repay a 401K loan. The debtor argued that because he continued to have negative disposable income on B22C even when the loan payment was ended, there was no legal reason for the debtor to increase his plan payment, and, alternatively, the debtor was surviving on a minimal budget for the first 18 month of his plan and should be allowed to increase his spending on his household when the loan was repaid.
The Court, applying established rules of statutory interpretation requiring “[c]ourts to give effect to every provision and word in a statute,” determined “[o]nly that amount required for repayment of the loan is deducted from the calculation of projected disposable income” because allowing a continued reduction of disposable income by the amount of the 401K loan after it is paid off “would result in the deduction of more than is necessary to repay the loan.” Anstett, at 384 (citations and internal quotation marks omitted). The Court declined to step into the “quagmire of the calculation of disposable income,” when the means test and Schedules I and J result in substantially different numbers, and instead focused on whether the plan was “a good faith effort to satisfy creditor’s claims.” Id. at 385. “The strict, mechanical application of § 1325(b)(1)(B) following computation of disposable income using artificial expenditures does not necessarily satisfy the requirement to propose a plan in good faith … The completion of payments to a 401K plan does not free that money for discretionary application but should shift to creditors, at least in significant part, and result in repayment of the people Debtor owes. To propose nothing further to them, especially with an initial one percent dividend, is not a good faith effort.” Id. at 386.
