By Ryan C. Wood
Section 541(b)(7) of the Bankruptcy Code provides that wages withheld from employee’s paycheck for contributions to Employee Retirement Income Security Act (“ERISA”) qualified employee benefit plans, deferred compensation plans or tax-deferred annuities are excluded from the bankruptcy estate. This means that any of the above contributions to your retirement account are not counted as assets in your bankruptcy estate no matter how much money you have contributed to these accounts. If you are filing for a Chapter 7 bankruptcy case that means your retirement account is protected from creditor’s claims and you do not have to liquidate your retirement account to pay your debts.
What happens when your bankruptcy lawyers file for a Chapter 13 bankruptcy case? When you file a Chapter 13 bankruptcy case, assets that are considered to be property of the estate, are essentially split between two time frames: on or before the date you file your Chapter 13 bankruptcy case and after the commencement of your Chapter 13 bankruptcy case but before your case is closed, dismissed, or converted. This means that before your Chapter 13 bankruptcy case is filed your retirement contributions are not considered to be property of the estate. After your Chapter 13 bankruptcy case is filed §1306(a) of the Bankruptcy Code states that all property acquired and earnings received after the case is filed but before the case is closed, dismissed or converted to a Chapter 7, 11, or 12 bankruptcy case, whichever occurs first, is part of the bankruptcy estate.
How can something be excluded from the bankruptcy estate before your case is filed but included in your bankruptcy estate after your case is filed? The court for In re Parks (9th Cir. BAP No. 11-60050, August 6, 2012) explained that you cannot deduct voluntary retirement contributions when calculating your disposable income on the means test. The means test calculates, at a minimum, how much your unsecured non-priority creditors should be paid in your Chapter 13 plan. The court indicated that Congress did not mention that 401k retirement plans were reasonable and necessary expenses under §707(b)(2) of the Bankruptcy Code and therefore cannot be deducted from the disposable income calculation on the means test. Repayment of your retirement plan loan, however, is excluded from the disposable income calculation under §1322(f) of the Bankruptcy Code.
But what about public employees who have their retirement deducted directly from their checks each month involuntarily. A public employee can continue to contribute to their retirement to the detriment of their creditors but a person with private employment cannot contribute to their 401k plan anymore? Something is very wrong with that picture.
To sum up the case for In re Parks: all the money you contributed towards your retirement plan prior to the filing of your bankruptcy case are excluded from the bankruptcy estate but you cannot continue to voluntarily contribute to your retirement plan when you are in a Chapter 13 bankruptcy case to the detriment of your unsecured creditors. You can only deduct repayment of the retirement loan as an expense from your disposable income calculation.
Bankruptcy laws may sometimes be confusing and it is advisable to seek the advice of an experienced bankruptcy lawyer in your jurisdiction to help you navigate your Chapter 13 bankruptcy case.