Opinion
Case No. 10-35209-svk.
December 21, 2010
DECISION AND ORDER ON TRUSTEE'S OBJECTION TO CONFIRMATION
This case concerns the disposition of 401(k) loan payments when the loan is scheduled to be paid in full prior to completion of the Chapter 13 plan. The Court previously considered the same issue in a decision reported on the Court's website. As in that case, the Debtors here propose to convert the loan repayment to a voluntary 401(k) contribution, but the Trustee contends that once the loan is satisfied, the Debtors must dedicate those payments to the plan.
Mark and Angela Noll (the "Debtors") are below-median debtors who filed a Chapter 13 case on September 17, 2010, and proposed a 36-month plan dedicating a share of $2,260 to unsecured creditors. The Debtors are obligated on two 401(k) loans due in June 2011 and September 2011. When the loans are paid off, the Debtors intend to continue to make payments to their 401(k) plan in the exact same amount, but to designate those payments as voluntary contributions rather than loan repayments. The Trustee contends that when the loans are repaid, the Debtors must increase their plan payments by the amount of the loan payments. Without a step-up in payments, the Trustee asserts the Plan fails to dedicate all of the Debtors' projected disposable income to the Plan, in violation of Bankruptcy Code § 1325(b)(1). At the hearing on the Trustee's objection, the Debtors' attorney argued that pre-petition 401(k) contributions are protected under the Code, and that the Debtors are merely converting 401(k) loan repayments into 401(k) contributions. Therefore, the Debtors are in essence making protected contributions to their 401(k) plan, but simply using a different name for the payments. The Debtors' attorney also posited that step plans are difficult to administer. The Trustee countered that the Debtors stopped making 401(k) contributions pre-petition, and that the loan repayments cannot be construed and protected as a continuation of pre-petition 401(k) contributions after the loan is satisfied.
The Court previously considered this issue in In re Stascak, No. 08-24392 (Bankr. E.D. Wis. Oct. 3, 2008). In that case, the above-median income debtors were obligated on two 401(k) loans that would be repaid before plan completion. Once the loans were satisfied, the debtors proposed contributing the funds to their 401(k) plan, rather than increasing the dividend to their unsecured creditors. The trustee contended the plan violated § 1325(b)(1) and argued that the loans should be prorated over the life of the plan — decreasing the debtors' deduction and increasing the dividend to unsecured creditors. The Court sustained the trustee's objection to the debtors' plan, holding that debtors cannot deduct more than the amount necessary to repay the loans. In re Stascak, No. 08-24392 (citing Coop v. Lasowski ( In re Lasowski), 384 B.R. 205 (B.A.P. 8th Cir. 2008), aff'd, 575 F.3d 815 (8th Cir. 2009)). Since Stascak, case law has developed supporting the finding that debtors may not deduct more than necessary to repay a 401(k) loan, regardless of whether the debtors propose to allocate those funds to a post-petition 401(k) contribution. See Burden v. Seafort ( In re Seafort), 437 B.R. 204 (B.A.P. 6th Cir. 2010); see also Nowlin v. Peake ( In re Nowlin), 576 F.3d 258 (5th Cir. 2009); In re Lasowski, 575 F.3d 815.
This Court finds Seafort particularly persuasive because the Bankruptcy Appellate Panel of the Sixth Circuit was confronted with parallel facts and the precise issue before this Court: "whether a debtor, who was not contributing to an ERISA qualified plan when the case was filed, may begin making 401(k) contributions once the 401(k) loan has been repaid." In re Seafort, 437 B.R. at 207. Like the Debtors in this case, the Seafort debtors were repaying 401(k) loans that would be satisfied in full before the completion of their Chapter 13 plan. The debtors were not making contributions to their 401(k) retirement plans at the time of the petition. And like the Debtors in this case, the Seafort debtors proposed to continue payroll deductions as 401(k) contributions in the same amount as the loan payments rather than increase the dividend to unsecured creditors. Id. at 206. The Seafort panel recognized that BAPCPA amended the Code to allow debtors to exclude 401(k) loan repayments from the calculation of projected disposable income, but that no provision was added to clarify how to treat loan repayment funds when the loan is paid within the life of a Chapter 13 plan. Id. at 207 (citing 11 U.S.C. §§ 541(b)(7), 1322(f)). However, a close analysis of those amendments in light of Congress's policy goal of balancing the interests of debtors and creditors led the panel to reason that only 401(k) contributions in existence before the debtor filed bankruptcy are excluded from disposable income. Id. at 210; 11 U.S.C. § 1325(b)(1).
This result squares with § 1322(f) of the Bankruptcy Code which prohibits a Chapter 13 plan from altering the terms of a 401(k) loan and excludes "any amounts" used to repay 401(k) loans from the calculation of a debtor's "disposable income," and § 1306 which provides that property of the estate includes all property and earnings the debtor acquires after the commencement of the case. "Notably, this section, which addresses property and earnings that come into existence after the debtor files a petition for relief does not exclude 401(k) contributions from property of the estate." Id. at 209. "Because Congress identified 401(k) contributions as excluded in § 541, but not in § 1306, the Panel concludes that the absence of any reference in § 1306 to 401(k) contributions was intentional." Id.
Accordingly, the Debtors may only exclude their loan repayments from disposable income so long as they are loan repayments. As soon as the loan is satisfied, the shield of § 1322(f) is removed, and the funds become available to creditors. If the Debtors had been making voluntary contributions pre-petition, they would be allowed to continue those contributions, but they cannot convert loan repayments into voluntary contributions and satisfy the Code's projected disposable income test.
With respect to the Debtors' argument that step-up plans are difficult to administer, the Debtors are free to prorate the loan repayments over the life of their Plan — taking a lower monthly deduction over a longer period of time. The Plan payment would necessarily increase from the $150 per month presently proposed, but the payment would stay the same over the entire applicable commitment period. Alternatively, the Debtors could propose a tiered plan that would increase payments to unsecured creditors once the 401(k) loans have been satisfied. Neither option would impermissibly modify the terms of the loan in violation of § 1322(f). See In re Lasowski, 575 F.3d at 820.
IT IS THEREFORE ORDERED: the Trustee's objection to confirmation is sustained and the Debtors must file an amended plan within 30 days or their case will be dismissed.
Dated: December 21, 2010