Retirement Account Contributions Allowed for Under-Median Income Chapter 13 Debtors: More on In re Parks

30 Dec Retirement Account Contributions Allowed for Under-Median Income Chapter 13 Debtors: More on In re Parks

picA state of Washington bankruptcy court decided that chapter 13 debtors with household incomes that are below their state’s median income levels can continue making contributions to 401(k) and other retirement accounts. In re Bruce, No. 11-40939-BDL (Bky.W.D.Wash. Dec. 11, 2012), held that the Ninth Circuit Bankruptcy Appellate Panel decision in In re Parks, 475 B.R .703 (9th Cir.BAP 2012), applied only to above-median income debtors who were subject to the bankruptcy code’s “means test.” The court in Bruce also held that Parks neglected to apply section 541(b)(7)(A)(i) in a manner which would allow chapter 13 debtors to continue such contributions under section 1325(b)(2)’s reasonableness standard.

Both Parks and Bruce agreed that chapter 13 debtors can continue to repay retirement account loans during the life of a chapter 13 plan.

The married debtors in Bruce had a three person household with a monthly income of $5,300.20. The husband listed a 401(k) contribution of $160.33 per month, and a 401(k) loan payment of $32.50 per month. The chapter 13 plan provided for a monthly payment of $900.00 month for 36 months,with anincreaseof $32.50 when the 401(k) loan loan was paid off one year into the plan.

The trustee objected, relying on In re Parks. The bankruptcy court made short work of the trustee’s argument regarding the means test, noting that the debtors were below median income, unlike the Parks debtor.

The court then turned to sections 1325(b)(2) and 541(b)(7)(A)(i), and addressed an argument not made by the debtor in Parks. The Bruce debtor argued that section 541 required that the 401(k) contributions made in the six months prior to the filing of the case be excluded from his income for purposes of section 1325(b)(2), and the court agreed. This meant that the ongoing 401(k) contributions would be allowed. The court also held that Bruce’s chapter 13 payment would not have to increase when his 401(k) loan repayment was finished.

The Parks decision inspired much commentary in the legal community, due to having been issued by an intermediate federal appeals court. Time will tell whether In re Bruce will be followed by other courts.

Photo courtesy of Flickr, trenttsd’s photostream.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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