In Chapter 13 bankruptcy, 401(k) or other voluntary retirement contributions reduce the amount unsecured creditors receive through your repayment plan. Because of this, some bankruptcy jurisdictions do not allow debtors to make voluntary retirement contributions during Chapter 13 bankruptcy. However, in other jurisdictions, courts look at each case individually and may allow contributions if they are reasonable and necessary for the debtor’s maintenance and support. Read on to learn more about whether you can make 401(k) or other voluntary retirement contributions during Chapter 13 bankruptcy.
(To learn more about how Chapter 13 and the repayment plan work, visit our Chapter 13 Bankruptcy area.)
When you file for Chapter 13 bankruptcy, you propose a plan to pay back all or a portion of your debts. How much you have to pay back depends on your income, expenses, assets, and types of debt. But you must contribute all of your disposable income to your Chapter 13 repayment plan for the benefit of your unsecured creditors. Disposable income is any income left over after paying all expenses that are reasonably necessary to support you and your dependents. (Get more details on what constitutes disposable income in Chapter 13.)
If you make retirement contributions during Chapter 13 bankruptcy, you have less money each month to contribute to your repayment plan. This means that you are essentially saving that money at the expense of your unsecured creditors.
With a few exceptions, the only expenses that reduce your disposable income are those that are reasonably necessary for your support and maintenance. Certain bankruptcy courts do not count voluntary retirement contributions as necessary expenses that should reduce the payout to your unsecured creditors.
There is a split among bankruptcy courts as to whether debtors can make voluntary retirement contributions during Chapter 13 bankruptcy. Some courts simply do not allow debtors to continue their retirement contributions because they do not consider them to be reasonably necessary expenses. In other jurisdictions, voluntary retirement contributions are not automatically considered unreasonable.
If you live in a jurisdiction that doesn’t automatically prohibit retirement contributions, the court typically looks at each debtor’s circumstances on a case-by-case basis. In general, the court will be more likely to allow retirement contributions if they are not excessive, your other expenses are reasonable (you do not have an extravagant lifestyle), and you are nearing retirement. The reasoning behind this is that debtors with modest lifestyles who are nearing retirement will need those contributions to support themselves. If not able to support themselves, the burden will likely fall on the government and taxpayers.
Because the rules in each bankruptcy jurisdiction are different, consider talking to a knowledgeable bankruptcy attorney in your area before filing your case.
If your retirement contributions are required by your employer as a condition of your employment or if you are paying back a retirement account loan, you can normally continue those payments during Chapter 13 bankruptcy. Because these contributions are not voluntary, they are considered necessary expenses that reduce your disposable income. But keep in mind that if your retirement loan is paid off before the end of your Chapter 13 repayment period, you will probably have to increase the amount of your plan payment.
For more information on retirement loan payments in Chapter 13 bankruptcy, see Can I make retirement account loan payments during Chapter 13?