Contributions to 401(k) One Factor in Abuse Analysis

Posted by NCBRC - June 10, 2014

401(k) contributions may be considered when determining whether the debtors’ chapter 7 case should be dismissed for abuse pursuant to section 707(b)(3)(B). In re Nunna, No. 13-5679 (Bankr. M.D. Fla. May 13, 2014). In Nunna, the Acting U.S. Trustee filed a motion to dismiss the debtors’ chapter 7 case as abusive. The bankruptcy court granted the trustee’s motion.

The debtors, a married couple in their forties, had secured debts relating to their residence and two vacant properties (they intended to surrender the vacant land), and unsecured debts primarily for credit cards, a personal loan, and a leasing agreement for a 2012 Mercedes C250 in the amount of $830.00 per month. In each of the three years preceding the motion to dismiss, Mr. Nunna earned approximately $100,000.00 and Mrs. Nunna was unemployed. After filing their chapter 7 petition, Mr. Nunna reduced his work hours such that his income decreased to three quarters of its pre-petition amount. Although the debtors claimed that they intended to cut down on expenses to compensate for the reduced income, they did not do so. Mr. Nunna consistently contributed the maximum allowed to his 401(k), and the savings in that plan were approximately double the amount of unsecured debt.

Setting out the principles governing a motion to dismiss under section 707, the court found that it had broad discretionary power to determine “whether the debtor has a meaningful ability to repay unsecured debts.” Factors to be considered include: 1) unforeseen catastrophic events, 2) whether the debtor’s standard of living has improved or stayed the same since filing, 3) debtor’s age and whether he or she has dependents, 4) whether the debtor is eligible for chapter 13 and how creditors would fare, 5) age of the debts and over what period of time they were incurred, 6) cash advances and purchases far in excess of ability to repay, 7) payments toward debts or attempts to negotiate repayment terms, 8) accuracy of expenses and debts on schedules, 9) good faith. These considerations should be applied with the ultimate goal of “effectuating justness and equity.”

The controversy in this case circled primarily around the debtors’ obtaining a discharge of all debts while continuing to contribute in the maximum amount to Mr. Nunna’s 401(k). The court identified a split in the courts as to whether it is ever appropriate to consider 401(k) contributions in the “totality of circumstances” test for abuse under section 707. In re Parada, 391 B.R. 492 (Bankr. S.D. Fla. 2008); In re Zaporski, 366 B.R. 758 (Bankr. E.D. Mich. 2007) (401(k) contributions not necessary for support, therefore counted in ability to pay analysis); In re Lavin, 424 B.R. 558 (Bankr. M.D. Fla. 2010); In re Norwood-Hill, 403 B.R. 905 (Bankr. M.D. Fla. 2009) (401(k) contributions, in and of themselves, cannot be basis for finding of abuse).

The debtors argued that, under the holding in In re Garrett, No. 07-3997, 2008 WL 6049236 (Bankr. M.D. Fla. Jan. 18, 2008), if the case had been filed under chapter 13, their 401(k) contributions would not be part of the disposable income calculation and therefore would not be accessible to creditors. Because the creditors receive nothing less in chapter 7, the debtors argued, the petition is not abusive. The court disagreed finding that Garrett is inapplicable in the chapter 7 context because chapter 7 differs from chapter 13, in that, in chapter 13 retirement accounts are specifically excluded from disposable income that must be applied to a plan. In re Tauter, 402 B.R. 903 (Bankr. M.D. Fla. 2009). In chapter 7, on the other hand, retirement accounts are deemed part of the bankruptcy estate. Thereforethe court found, the existence of a retirement account and the debtor’s continued payments into that account is relevant to whether there was abuse under section 707.

In its Findings of Fact and Conclusions of Law, the court found that Mr. Nunna had many more years of employment ahead of him so that there was no need in the near future for those retirement funds. The fact that Mr. Nunna reduced his working hours, and thus his income, after the trustee filed the motion to dismiss weighed against the debtors. Despite expressing general reluctance to substitute its judgment for that of the debtors, the court then addressed the necessity of the debtors’ expenditures, finding that the following five factors applied: whether the debtors’ expenditures were 1) for luxury items, 2) for excessive costs related to non-luxury items, 3) for amounts set aside in excessive amounts for discretionary spending, 4) designed to preclude repayment of debts, and 5) excessive or unreasonable. The court turned to the IRS’s National and Local Standards for guidance as to reasonableness of the debtors’ budget and found that the debtors’ expenses exceeded the IRS standards in virtually every category.

The court concluded that “Debtors and their family are still living an above-standard lifestyle and have not significantly tightened their financial spending habits, notwithstanding filing bankruptcy.” On these grounds the court found that the debtors’ petition was abusive.

Nunna opinion


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