Can I Deduct 401(k) Loan Payments on the Chapter 7 Means Test?

If you’re considering filing for Chapter 7 bankruptcy in New York and currently repaying a loan from your 401(k) retirement account, you may be wondering whether that monthly deduction counts against your disposable income on the Means Test.

The short answer is: No, 401(k) loan repayments cannot be deducted on the Chapter 7 Means Test—but they can be in Chapter 13.

Here’s a breakdown of why that is and how it might affect your case.

📜 What the Bankruptcy Code Says

The Means Test under 11 U.S.C. § 707(b)(2) is designed to determine whether a Chapter 7 filing is abusive. If your income is above the state median, the court uses this test to see how much disposable income you have available to pay unsecured creditors.

You can deduct:

  • Secured debts (like a car loan or mortgage)

  • Priority debts (such as child support or recent taxes)

  • Necessary expenses (as defined by IRS standards)

But 401(k) loan repayments don’t fall into any of these categories under Chapter 7 law.

❌ Why You Can’t Deduct a 401(k) Loan in Chapter 7

Courts have consistently held that repaying a 401(k) loan is not a “debt” in the traditional sense—because you’re essentially paying yourself back.

📚 In Egebjerg v. Anderson, 574 F.3d 1045 (9th Cir. 2009), the court ruled that:

“A 401(k) loan is not a ‘debt’ under 11 U.S.C. § 101(12), and therefore its repayment cannot be deducted under the Chapter 7 Means Test.”

📚 Similarly, in In re Harrison, 2010 Bankr. LEXIS 323, the court found that a debtor’s attempt to deduct 401(k) repayments was improper, and the case was dismissed due to presumed abuse.

These cases reflect a clear consensus: Chapter 7 debtors may not deduct 401(k) loan payments from their monthly disposable income when completing the Means Test.

✅ But You Can Deduct It in Chapter 13

Under Chapter 13, the rules are different. Courts and trustees generally allow 401(k) loan repayments as a line-item expense when calculating the debtor’s projected disposable income for plan payments.

This means:

  • Your Chapter 13 payment plan will account for your 401(k) loan repayment.

  • It could lower the amount you’re required to pay to unsecured creditors during the plan.

This distinction often makes Chapter 13 a more flexible option for debtors who are actively repaying retirement loans.

🧮 How It Affects Your Bankruptcy Strategy

Filing Type Can Deduct 401(k) Loan? Impact
Chapter 7 ❌ No May trigger Means Test failure or dismissal for abuse
Chapter 13 ✅ Yes May reduce plan payment and improve feasibility

If you’re borderline on the Means Test in Chapter 7 and have a 401(k) loan, you may find yourself ineligible for Chapter 7 and instead pursuing relief through Chapter 13, where your repayment will be factored into your budget.

💼 Legal Takeaway

401(k) loan repayments cannot be deducted on the Chapter 7 Means Test—but they can be deducted in Chapter 13.

If you’re repaying a retirement loan and trying to qualify for Chapter 7, speak with a bankruptcy attorney who can:

  • Evaluate your income and Means Test results

  • Explore possible “special circumstances” arguments (though these rarely succeed)

  • Help you pivot to Chapter 13 if needed

📞 Need Help With the Means Test?
At the Law Office of William Waldner, we help New Yorkers make informed choices about Chapter 7 and Chapter 13 bankruptcy. If you’re dealing with a 401(k) loan, we’ll walk you through your options and help you file a case that works.

📅 Schedule a consultation today at www.midtownbankruptcy.com

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