Chapter 13 Debtor Can Put Earnings Into 401(k)

By Daniel Gill

Chapter 13 debtors can deduct 401(k) contributions in calculating their disposable income that must be contributed to a payment plan, even if they weren’t contributing in the six months prior to the bankruptcy, an Illinois bankruptcy judge ruled Oct. 30.

The court followed what it said was the majority of courts considering the question and found that absent a showing of bad faith, the retirement plan deductions could be included among the debtor’s expenses ( In re Davis , 2017 BL 388901, Bankr. C.D. Ill., No. 17-70784, 10/30/17 ).

Paul and Rebecca Davis filed for Chapter 13 on May 10, 2017. Chapter 13 allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three- to five-year period.

Debtors are required to commit their “disposable income” to the plan, for payment to creditors. The Davises wanted to deduct $200 a month from their disposable income. That money would go to Paul’s 401(k) account.

The Chapter 13 trustee objected because the debtor hadn’t made those contributions in the six months preceding bankruptcy. The trustee conceded that if the debtors had been making the contributions over that period, they would be entitled to the deduction.

“The majority of courts interpreting this legislative framework have found that postpetition 401(k) contributions are fully deductible in calculating a debtor’s disposable income,” the court said. “Such contributions, however, must be within permissible and legal limits and must be made in good faith.”

The court found that there were no allegations and no showing of bad faith on the part of the debtors. “The simple fact that taking an expense deduction results in less money being available to pay unsecured creditors is not evidence of the lack of good faith,” it said.

The court’s decision to allow the deduction “is fully consistent with the congressional policy of protecting and encouraging retirement savings,” it said.

Paul and Rebecca Davis were represented by Marcia L. Moellring, Quincy, Ill. John H. Germeraad, the Chapter 13 trustee, was represented by Kenneth Takis Siomos, Springfield, Ill.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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