401(k) Contributions are Okay in a Chapter 13

Minnesota is in the Eight Circuit, which includes the Dakotas, Nebraska, Iowa, Missouri and Arkansas.  Nevertheless, cases from other circuits may be helpful in understanding the law.

A recent case out of the Sixth Circuit (Michigan, Ohio, Kentucky and Tennessee) dealt with a person who filed chapter 13 bankruptcy but wanted to deduct her voluntary 401(k) contributions from her bankruptcy budget.  She had been making the contributions for more than six months before filing bankruptcy.

The court formulated the issue as follows:

Davis proposed a bankruptcy plan that would pay her unsecured creditors a total of $19,380—equal to sixty monthly payments of $323. To obtain court approval, her plan needed to provide for payment of all her “projected disposable income” to her unsecured creditors.  Davis believed that $323 represented her monthly disposable income. Although she reported gross monthly income of $5,627, she claimed $5,304 in allowable monthly expenses. One of those claimed expenses was a monthly retirement contribution. Long before her bankruptcy, Davis had authorized her employer to withhold $220.66 from her monthly wages as contributions to a 401(k) retirement plan. Davis sought to continue those contributions during her bankruptcy. The Trustee objected to Davis’s plan. The Trustee contended that wages withheld as voluntary 401(k) contributions are considered disposable income under the Code; as a result, Davis’s proposed plan would not pay all her projected disposable income to her unsecured creditors. The bankruptcy court sustained the Trustee’s objection.

In other words, the bankruptcy court said that Davis should pay $543.66 per month to her creditors instead of $323.00.

The Sixth Circuit Court of Appeals, in a 2-1 decision, noted that there are "four competing views of whether voluntary retirement contributions constitute disposable income in a Chapter 13 bankruptcy." The court went on to rule that Davis could continue to make her 401(k) contributions, saying" 

"Here, Davis’s employer withheld $220.66 in 401(k) contributions each month from Davis’s wages for at least six months prior to her bankruptcy. We hold only that a debtor in like circumstances may deduct her monthly 401(k) contributions from her disposable income under § 1325(b)(2). See 11 U.S.C. § 541(b)(7)(A)."

It is important to note that this pertains to Chapter 13 cases, not Chapter 7 cases.  But this decision may give comfort to those who need to file a Chapter 13 case that they will not have to stop contributing to their retirement plans while in the Chapter 13.

The case in question is In Re Davis, 960 F.3d 346 (6th Cir., 2020)

As always, if you have bankruptcy questions, feel free to contact me.