401(k) Contributions in a Chapter 13 Plan are Disallowed in Calculation of Disposable Income

In the case of In re Parks, the Bankruptcy Appellate Panel for the Ninth Circuit held that only pre-petition 401(k) contributions shall not constitute disposable income. In that case, above-median income debtors were making monthly $318 voluntary contributions to their 401(k), and listing $40 monthly disposable income on their first amended Chapter 13 plan.

The trustee assigned to the case objected to the confirmation of the debtors’ plan, contending that any ongoing 401(k) contribution should be disallowed in any calculations of the debtors’ disposable income. While courts nationwide are split on the issue, the bankruptcy court below entered an order denying confirmation of the debtors’ first amended plan and the BAP affirmed.

Under 11 U.S.C. § 541(a)(1), earnings from services performed by the debtor (during the period after the commencement of the case but before the case is closed, dismissed, or converted) are considered property of the bankruptcy estate. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) created additional exclusions, including 401(k) contributions, to bankruptcy estate property via § 541(b)(7)(A). The BAP for the ninth circuit interpreted these exemptions to apply ONLY to contributions made prior to the bankruptcy petition date.

Furthermore, § 1325(b)(2)(A)(i) defines disposable income as “current monthly income received by the debtor . . . less amounts reasonably necessary to be expended . . . for the maintenance of the debtor . . . .” Voluntary contributions to a 401(k) are nowhere stated as reasonably necessary expenses.

KEYWORDS: Chapter 13 Bankruptcy, Chapter 13 Plan, Disposable Income, Voluntary 401(k) Contributions, 11 U.S.C. Section 541; disposable income, Bankruptcy Abuse Prevention and Consumer Protection Act, BAPCPA, Above-Median Income Debtors, Bankruptcy Appellate Panel for the Ninth Circuit, In re ParksParks v. Drummond

Read Related Posts: