Written by attorney Mohammed Omar Badwan

401(k) Deductions and the Means Test

Many clients are stumped when I inform them that they do not qualify for a Chapter 7 because they have disposable income at the end of the month after all their necessary expenses are deducted. Any debtor making over the median income for the applicable household size must pass the means test in order to file a Chapter 7. The means test is a complicated test and many of its per se "ambigious rules" are still unsettled by the Courts. However, the Northern District of Illinois has made it clear that 401(k) deductions from a debtor's paycheck are not "necessary expenses" and can not be used as a deduction in the means test. This ruling affects many clients who are close to qualifying for a Chapter 7. Many debtors enroll in 401(k) programs and have a percentage of their earnings deposited into their 401(k) accounts. The clients are understandably frustrated when I explain to them that it can not be used as a "necessary expense". It is money the clients do not have the luxury of spending each month yet they are not allowed to deduct it in the means test. The Court ruled that the only time a 401(k) expense can be used as a deduction is if it is required for employment. Not many employers require employees to enroll in 401(k) programs. I, along with many consumer rights attorneys do not agree with the decision made in the Northern District of Illinois. With the rising costs of living, social security benefits are not sufficient to maintain a minimal standard of living. Therefore, saving for the retirement is quasi-mandatory for anyone hoping to live an independent retirement.

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