In Chapter 13 bankruptcy, 401(k) or other voluntary retirement contributions reduce the amount creditors receive through your repayment plan, so most jurisdictions don’t allow them. Some, however, might approve contributions if you’re approaching retirement age and the contributions are reasonable and necessary. Read on to learn more about whether you can make 401(k) or other voluntary retirement contributions during Chapter 13 bankruptcy.
When you file for Chapter 13 bankruptcy, you propose a plan to pay back all or a portion of your debts. How much you’ll pay back will depend on your income, expenses, assets, and debt type. The “best effort” rule requires you to contribute all of your disposable income to your Chapter 13 repayment plan for the benefit of your unsecured creditors.
So what is disposable income? It’s any income left over after paying all expenses reasonably necessary to support you and your dependents. Of course, having unreasonably high expenses won’t get you out of paying creditors. The bankruptcy rules determine what are reasonable. Your plan won’t be determined by your actual costs.
Making retirement contributions during Chapter 13 bankruptcy means you’ll have less money each month to contribute to your repayment plan. If you were allowed to do this, you’d be saving money at the expense of 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 don’t consider voluntary retirement contributions necessary expenses. So, while, it’s best to assume that you won’t be able to make these contributions, talking to a local bankruptcy attorney will be the simplest way to find out the practices of your court.
Not all courts agree whether debtors can make voluntary retirement contributions during Chapter 13 bankruptcy. Some courts don’t consider them to be reasonably necessary expenses; however, in other jurisdictions, voluntary retirement contributions aren’t considered unreasonable automatically.
If you live in a jurisdiction that doesn’t automatically prohibit retirement contributions, the court will typically look 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 aren’t excessive, your other expenses are reasonable (you don’t have an extravagant lifestyle), and you’re 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 hiring a knowledgeable bankruptcy attorney in your area before filing your case.
If your employer requires retirement contributions as a condition of your employment or if you are paying back a retirement account loan, you can typically continue those payments during Chapter 13 bankruptcy. These contributions aren’t voluntary. They’re necessary expenses that will 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.
(Learn more about your retirement plan in bankruptcy.)