Mary Anne Ethington

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
FAYETTEVILLE DIVISION
IN RE:
MARY ANNE ETHINGTON,
DEBTOR
CASE NO.
08-09384-8-RDD
ORDER GRANTING BANKRUPTCY ADMINISTRATOR’S MOTION TO DISMISS
CHAPTER 7 PROCEEDING OR TO CONVERT TO CHAPTER 13 WITH DEBTOR’S
CONSENT PURSUANT TO 11 U.S.C. § 707(b)(1)
Pending before the Court is the Motion of the Bankruptcy Administrator to Dismiss Debtor’s
Chapter 7 Case pursuant to 11 U.S.C. § 707(b)(1) (the “Motion to Dismiss”), and the Response in
Opposition to the Bankruptcy Administrator’s Motion to Dismiss filed by Mary Anne Ethington (the
“Debtor”). A hearing was held in Fayetteville, North Carolina on May 7, 2009.
The issue before the Court is whether the Debtor’s Thrift Savings Plan (the “TSP”) loan
repayment is an involuntary deduction under the Internal Revenue Manual (the “IRM”), thereby
allowing such payments to be deducted as an “Other Necessary Expense” under Section
707(b)(2)(A)(ii)(I) of the Bankruptcy Code. Based on the following, the Court finds that pursuant
to 11 U.S.C. § 707(b)(2)(A)(ii)(I) and Section 5.15.1.10 of the IRM, the Debtor’s TSP loan
repayment is not an involuntary deduction. Furthermore, because of the inability of the Debtor to
SO ORDERED.
SIGNED this 19 day of June, 2009.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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1The sixty month disposable income of $4,819.20 is calculated based on sixty months times the Debtor’s
monthly disposable income of $80.32.
2
deduct the TSP loan repayment as an Other Necessary Expense, the Debtor fails the means test and
abuse is presumed.
BACKGROUND
On December 30, 2008, the Debtor filed a voluntary petition for Chapter 7 relief in the
United States Bankruptcy Court for the Eastern District of North Carolina. The Debtor has been
employed by the Department of Defense for twenty-six years. Her current monthly income listed
on her amended form B22A is $7,340.54 and her deductions are $7,260.22. 	Included in the
deductions is a $650.04 monthly TSP loan repayment which is classified as an involuntary deduction
for employment on Line 26 of the form. Based on the amended B22C form, the Debtor’s sixty
month disposable income under Section 707(b)(2) totals $4,819.201 and, therefore, there would be
no presumption of abuse.
On March 18, 2009, the Bankruptcy Administrator (the “BA”) filed the Motion to Dismiss.
The BA challenges whether the TSP loan repayment is an involuntary deduction under Section
5.15.1.10 of the IRM. The BA asserts that an involuntary deduction must be a deduction that is a
requirement of the debtor’s job. The BA maintains that the TSP loan repayment was not a
requirement of the Debtor’s job and, therefore, should not be allowed as an involuntary deduction
on from B22C.
On March 31, 2009, the Debtor filed her response to the Motion to Dismiss asserting that the
deduction for the TSP loan repayment was allowable under applicable law. The Debtor contends
that the TSP loan payment was an involuntary deduction since she had no choice in having the
payment automatically deducted from her wages.
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3
At the hearing, the Debtor testified that she took out the TSP loan in 2004 after her husband
left the marital residence. She stated that the proceeds of the loan were used to pay Pennsylvania
real estate taxes, her son’s tuition, credit card debt and other loans. The Debtor immediately began
repaying the TSP loan at a monthly rate of $650.04 through payroll deduction. The payroll
deductions lasted through the means testing period and the TSP loan was repaid in January 2009.
DISCUSSION
Based on the evidence presented to the Court, the Debtor has failed to establish the TSP loan
repayment as an involuntary deduction under the IRM. Under 11 U.S.C. § 707(b)(2)(A)(ii), a debtor
may deduct “Other Necessary Expenses” as determined by the Internal Revenue Service (the “IRS”).
Involuntary deductions are considered a necessary expense allowed under the IRM.
Section 707(b)(2)(A)(ii)(I) states that “the debtor’s monthly expenses shall be the debtor’s
. . . actual monthly expenses for the categories specified as Other Necessary Expenses issued by the
Internal 	Revenue 	Service 	for 	the 	area 	in 	which 	the 	debtor 	resides 	. 	. 	. 	.” 	11 	U.S.C.
707(b)(2)(A)(ii)(I). The “Other Necessary Expenses” issued by the IRS are found in the IRM. Part
five, chapter fifteen, section one of the IRM is labeled the Financial Analysis Handbook. IRM,
Section 5.15.1. 	The handbook sets forth three types of allowable expenses, including “Other
Expenses.” IRM, Section 5.15.1.7. “Other Expenses” is listed as an allowable expense if it meets
the necessary expense test; “expenses that are necessary to provide for a taxpayer’s and his or her
family’s health and welfare and/or production of income.” 	Id. 	Involuntary deductions are
considered “Other Expenses” that satisfy the necessary expense test “if [the expense] is a
requirement of the job.” IRM, Section 5.15.1.10. The IRM expressly provides that “contributions
to voluntary retirement plans are not a necessary expense.” IRM, Section 5.15.1.23.
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4
Though this issue is of first impression before this Court, two cases arising in other
jurisdictions have dealt squarely with the issue of whether a loan repayment to a 401(k) plan loan
is an involuntary deduction. See In re Turner, 376 B.R. 370 (Bankr. D. N.H. 2007); In re Barraza,
346 B.R. 724 (Bankr. N.D. Tex. 2006). In Turner, the debtor made voluntary contributions to her
401(k) retirement plan and repaid the loans from that plan as a direct deduction from her paycheck.
Turner, 376 B.R. at 373. In that case, the debtor was required to pay the 401(k) loan for the duration
of her employment. 	Id. A default by the debtor would not have caused her employment to be
terminated, but would have resulted in a direct taxable distribution which would have been reported
to the IRS. Id. The court in Turner reasoned that “the fact that the debtor took a loan against those
[voluntary contributions] under loan terms that mandate repayment by payroll deductions does not
change the nature of the funds when debtor repays them.” Turner, 376 B.R. at 373 (quoting In re
Lenton, 358 B.R. 651, 657 (Bankr. E.D. Pa. 2006)). The Turner court concluded that because the
debtor’s initial contributions were voluntary and the loan repayment was not required for her
employment, the loan repayment was not an involuntary deduction.
Similarly, the Bankruptcy Court in the Northern District of Texas, in In re Barraza, followed
the same reasoning. 346 B.R. 724 (Bankr. N.D. Tex. 2006). The Barraza Court concluded that
because the only consequence to the debtor in defaulting on his 401(k) loans was a taxable
distribution and not loss of employment, the loan repayments did not qualify as involuntary
deductions. Barraza, 346 B.R. at 730.
The facts in this case are similar to both the facts in Turner and Barraza. The Debtor’s TSP
loan was borrowed from the Debtor’s voluntary TSP account and her account balance was reduced
by the amount of the loan. When the Debtor repaid the loan, her payments were reinvested in her
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2Http://www.tsp.gov/forms/publications.html.
5
individual TSP account. In essence, she was repaying her original voluntary contribution to her TSP
account in order to maintain its balance and avoid the tax consequences related to an early
withdrawal. The “nature of the funds”, Turner 376 B.R. at 373, does not change from the time the
voluntary contributions are first deposited, through the borrowing of those same funds and then the
subsequent repayment. The fact that the funds were repaid by a direct deduction from her payroll
account does not change the fact that the Debtor’s original contribution to the TSP account was
voluntary. 	Therefore, because the funds originate from the Debtor’s voluntary contribution, the
repayment of such funds is not considered an involuntary deduction.
The TSP Manual states that “when [the debtor] agree[s] to the loan terms, ... [she] agree[s]
to repay the loan in full and [she] authorize[s] payroll deductions.” TSP Manual at 8. The Debtor
authorized the loan repayment through payroll deduction and an involuntary deduction can not occur
where the Debtor, not the employer, authorizes the payroll deduction.
Finally, the TSP loan repayment was not a requirement of the Debtor’s employment. The
TSP manual informs the borrower to read the TSP Fact Sheet “Bankruptcy Information” in the event
of a bankruptcy.2 The TSP Fact Sheet “Bankruptcy Information” informs the borrower that if he
ceases to make loan payments, the TSP will close his loan and report the unpaid loan balance to the
IRS as a taxable distribution. 	The TSP manual also states that a taxable distribution will be
declared on the borrower’s unpaid balance if he fails to replenish the funds which are withdrawn.
The Debtor testified at the hearing that she would not lose her job if she stopped making
payments on the TSP loan. 	Had the Debtor discontinued the TSP loan repayments, the only
consequence for failing to pay back the loan is that she would have been taxed on the distribution.
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3The Court “may dismiss a case filed by an individual debtor . . . if it finds that the granting of relief would
be an abuse of the provisions of this chapter.” 11 U.S.C. § 707(b)(1). “The court shall presume abuse exists if the
debtors current monthly income reduced by [expenses] and multiplied by 60 is not less than the lesser of (I) 25
percent of the debtor’s nonpriority unsecured claims in the case, or $6,575, whichever is greater; or (II) $10,950.” 11
U.S.C. § 707(b)(2)(A)(i). In this case, 25% of the Debtor’s nonpriority unsecured claims is $16,630.81. See Schedule
F. Therefore, for abuse to be presumed, the Debtor’s current monthly income multiplied by sixty must exceed
$10,950.00.
6
Because the repayment of the TSP loan is not a requirement of the Debtor’s employment, it is not
an involuntary deduction under “Other Necessary Expenses” of 11 U.S.C. § 707(b)(2)(A)(ii) or the
IRM.
Consequently, the TSP loan repayment is not an involuntary deduction and, therefore, may
not be deducted on Line 26 of form B22C. Based on the non-allowance of the TSP loan repayment
deduction, the Debtor’s total deductions allowed under 11 U.S.C. § 707(b)(2) is $6,610.18 and her
current monthly income is $7,340.54. Thus, the Debtor’s monthly disposable income is $730.36 and
her sixty month disposable income would be $43,821.60 which exceeds $10,950.00, 3 the amount
at which abuse is presumed. Therefore, the Court finds a presumption of abuse of the provisions of
Chapter 7 and that grounds exist to justify dismissal of the case for abuse. However, on May 19,
2009, Debtor moved to convert the case to Chapter 13. The Court views the motion to convert as
consent to convert to Chapter 13 under Section 707(b)(1) of the Bankruptcy Code. 	The Court
therefore affirms the order entered May 28, 2009 to convert this case to Chapter 13.
SO ORDERED.
END OF DOCUMENT
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