401(k) Contributions Not Allowed While In Chapter 13, Appeals Court Rules

12 Aug 401(k) Contributions Not Allowed While In Chapter 13, Appeals Court Rules

Achapter 13 debtor cannot continue payroll deductions fora voluntary retirement account, such as a 401(k), during a chapter 13 case, according to a recent appeals court ruling. In re Parks, No. 11-60050 (9th Cir. BAP Aug. 6, 2012), also ruled that 401(k) loan repayments could, however, continue during a chapter 13 plan. While In re Parks shows that courts around the nation continue to be split on the chapter 13 voluntary retirement account contribution question, Parks also preserves theunanimity among courts that retirement account loans can continue to be repaid during a chapter case.

The debtor in the Parks case had included in his “means test,” or Form B22C, and also on his Schedule I, a monthly deduction of $318.00 for ongoing contribution to his 401(k) plan. This deduction left him with a negative $40.04 on the means test,but with a positive $886.97 on his Schedules I and J. He proposed a monthly chapter 13 payment of $475.03.

The chapter 13 trustee objected, arguing that sections 541(b)(7)(A) and 1306 of the bankruptcy code should read together to forbid a debtor from continuing to make voluntary retirement account contributions while in chapter 13. The trustee asked the court to rule that such contributions should instead be paid into the chapter 13 plan, in order to makeadditional payments to creditors of the debtor.

The appeals court agreed with the trustee. Itnoted that although section 541(b)(7)(A) excludes retirement account contributions from the bankruptcy estate, and excludes such contributions from section 1325’s definition of disposable income, the exclusion only applies to funds already contributed to the retirement account on the date of the filing of the chapter 13 case. Thus, ongoing retirement account contributions were not within the scope of section 541(b)(7)(A) and were forbidden.

The appeals court also found it persuasive that while section 1322(f) specifically allows for the repayment of retirement account loans during chapter 13, section 1322(f) is silent on the subject of ongoing retirement account contributions. The court therefore ruled thatalthough Congress had chosen to allow repayments of retirement loans during chapter 13, the omission of ongoing payments into retirement accounts from section 1325 demonstrated that Congress had chosen not to allow them.

Image credit:401(K) 2012

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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