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Debtors Good-Faith Use of a 401(k) Loan to Avoid Bankruptcy Should Not Trigger Presumption of Abuse in a Chapter 7 Filing According to Latest ABI Quick Poll

Contact: John Hartgen
             703-739-0800
             jhartgen@abiworld.org

DEBTORS’ GOOD-FAITH USE OF A 401(K) LOAN TO AVOID BANKRUPTCY SHOULD NOT TRIGGER PRESUMPTION OF ABUSE IN A CHAPTER 7 FILING, ACCORDING TO LATEST ABI QUICK POLL

 

September 5, 2008, Alexandria, Va.— A majority of respondents (78 percent) in a recent ABI Quick Poll agreed that debtors’ good-faith use of a 401(k) loan to pay off debt in an attempt to avoid bankruptcy constitutes special circumstances rebutting the presumption of abuse in a chapter 7 case. Fifty-four percent of respondents “strongly agreed” and 24 percent “somewhat agreed” that a debtors’ use of a 401(k) loan to avoid bankruptcy was a circumstance that should not trigger a presumption of abuse if the debtor eventually files for chapter 7 protection.

Twelve percent of respondents, however, thought that the use of a 401(k) loan by a debtor to avoid bankruptcy could constitute a presumption of abuse in a chapter 7 case. Eight percent “disagreed strongly” and four percent “somewhat disagreed” that a debtor’s good faith use of a 401(k) loan to avoid bankruptcy rebutted the presumption of abuse in a debtor’s chapter 7 filing Eight percent of respondents did not know or had no opinion on the issue.

In the case of In re Cribbs,the U.S. Bankruptcy Court for the Southern District of Georgia found that the debtors used a loan from their 401(k) plan in a good-faith effort to settle with their creditors to avoid filing for bankruptcy. While the debtors eventually had to file for chapter 7, the court held that the debtors’ good-faith use of the loan to avoid bankruptcy as a special circumstance negated the presumption of abuse in the chapter 7 case. 

ABI members and members of the public were welcome to submit their response to the statement: “Debtors’ good faith use of a 401(k) loan to pay off debt in an attempt to avoid bankruptcy constitutes special circumstances rebutting the presumption of abuse in a chapter 7 case. In re Cribbs, 387 B.R. 324 (Bankr. S.D. Ga. 2008).”

ABI’s Quick Poll is posted on ABI’s home page, www.abiworld.org. ABI members and the public are invited to respond to a question on a timely bankruptcy or insolvency issue. Visit http://www.abiworld.net/quickpoll/ to access the results of previous ABI Quick Polls.

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ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes nearly 11,700 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abiworld.org/conferences.html.