Contributing to 401(k) During Bankruptcy

September 10, 2012

Recently the Ninth Circuit Bankruptcy Appellate Panel (BAP) ruled that bankruptcy debtors must stop their voluntary contributions to 401(k) retirement plans during their Chapter 13 cases. The BAP reasoned that the Chapter 13 debtor must commit all disposable income to repaying debts during the bankruptcy case, including money that would otherwise be used to fund a retirement plan.

Chapter 13 debtors repay debts over three to five years based on their financial ability. A repayment plan is proposed by the debtor and is subject to approval by the bankruptcy court. While income earned during the case is under the control of the bankruptcy court, nearly all retirement accounts are protected during bankruptcy and cannot be touched by the bankruptcy trustee or creditors.

Many courts have allowed debtors to continue to make deposits into their retirement savings accounts during the Chapter 13 repayment period. Federal bankruptcy courts (including those in the Ninth Circuit) are not obligated to follow the BAP decision. Only ruling from the US Supreme Court and the Federal Appellate Court for the Ninth Circuit will “bind” bankruptcy courts. Consequently, this ruling by the Ninth Circuit does not immediately change your local bankruptcy court’s practices, but it will undoubtedly cause local Chapter 13 bankruptcy trustees to re-examine the issue.

The issue of 401(k) contributions highlights the complex and ever-evolving nature of the bankruptcy law. The law can change quickly, and you need an experienced bankruptcy attorney who stays current in developing issues and can foresee and avoid complications in your case. Bankruptcy relief is very real and very powerful, but the path to this relief can sometimes become very treacherous. An experienced attorney will navigate your case away from problems and to the best possible outcome.
 

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