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The U.S. Court of Appeals in San Francisco , in Egjebjerg v. Anderson, found that a individuals repayment of a 401k plan loan did not represent a payment of secured debts or a necessary expense that could be deducted from the individuals monthly income for purposes of applying the means test under  Chapter 7.

To avoid bankruptcy, an individual acquired a loan from his 401k plan, and was repaying the loan under the 5 year repayment rule. The individual later filed for bankruptcy under Chapter 7 of the Bankruptcy Code, claiming less than $20 as monthly disposable income. The calculation of the individual's monthly income included the 401k loan repayment as a necessary expense.

An individual is permitted under the Chapter 7 means test to deduct average monthly payments made on account of secured debts. Under the means test, individuals can deduct monthly expenses that qualify as other necessary expenses.
The individual, in this case, purported that the 401k loan repayments were a necessary expense. That the replenishment of his 401(k) account was necessary to his long-term health and welfare because the account would be his only significant asset in retirement.

The court rejected the individual's claim, noting the Bankruptcy Code expressly states that contributions to 401k retirement plans are not a necessary expense. Finding 401k loan repayments to be the essentially equivalent of voluntary 401k contributions to a retirement plan, the court concluded that the contributions could not be deducted from income as a necessary expense.

Noting that an individuals obligation under a 401k loan is to ones self, the court found that the plan administrator has no right to recovery against the individual in the event of default. The plan has no right to sue the individual for payments; it can only offset the funds against future benefits. The deemed distribution that results from a loan default under Section 72p, will also only result in tax penalties, and does not provide the plan with repayment rights or other legal recourse.

After examining all aspects of the case, the court dismissed the Chapter 7 petition, reasoning that because the loan would be repaid at the time the court's order was issued, the individual would have sufficient funds to pay a significant amount of the debts in a Chapter 13 proceeding. But, based on the majority of jurisdictions, the requirement to repay a loan from a retirement account is not a debt under the Bankruptcy Code that may be deducted from income under the means test.

The court recognized that individuals in Chapter 13 proceedings are expressly authorized to deduct 401k loan repayments in the determination of disposable income. However, the court cautioned, bankruptcy law does not provide an equal right for Chapter 7 individuals.