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Bankruptcy Law Allows Debtors to Continue Retirement Contributions

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Bankruptcy Law Allows Debtors to Continue Retirement ContributionsA Chapter 13 bankruptcy trustee in Illinois recently objected to a debtor’s request to exclude $200 per month from his disposable income in order to contribute to his 401K retirement plan. The trustee questioned the motivation of the decision because the debtor had not made any contributions to the plan in the six months prior to filing for bankruptcy. However, an Illinois bankruptcy court denied the objection, stating that the debtor was within his rights. The ruling shows how bankruptcy courts treat retirement plan contributions as a protected expenditure.

Chapter 13 Plans

As opposed to Chapter 7 bankruptcy, Chapter 13 bankruptcy involves creating a repayment plan instead of liquidating assets. Qualified debtors must submit documents that detail their:

  • Creditors and debts owed;
  • Regular income;
  • Necessary expenses; and
  • Properties owned.

The debtor's repayment plan is based on the amount of disposable income he or she has each month. A trustee is appointed to oversee the repayment plan and distribute the payments amongst creditors.

Excluded Expenses

The debtor determines his or her disposable income by subtracting his or her monthly living expenses from his or her monthly income. Expenses that may be excluded from a debtor’s disposable income include:

  • Food and clothing;
  • Shelter;
  • Utilities;
  • Child expenses;
  • Transportation;
  • Taxes;
  • Medical expenses; and
  • Retirement plan contributions.

Illinois exempts retirement plan contributions more as a way to encourage saving for the future than as a way to protect a needed expense.

Case Details

The trustee in the recent bankruptcy case said that his objection was about when the debtor decided to start making the 401K contributions. The financial records that the debtor filed as part of the bankruptcy showed that he had not made any contributions in the past six months. Instead, he restarted his contributions after he had filed for bankruptcy, which decreases his disposable income. In some Illinois bankruptcy cases, courts have ruled that retirement plan contributions can be included with living expenses only if the debtor had consistently made contributions prior to bankruptcy. However, the court in this case stated that a majority of Illinois courts have sided with the debtors when they resume contributions after filing for bankruptcy. The court said that:

  • The debtor had contributed in the past, with his 401K valued at $56,000; and
  • There is no evidence that the debtor made the decision in bad faith.

Keeping Debtors Honest

Creditors must be cautious when accepting a Chapter 13 repayment plan, as some debtors will try to understate their debts or incomes. A Chicago creditor’s rights attorney at Walinski & Associates, P.C., can study a repayment plan and contest inaccuracies. To schedule a consultation, call 312-704-0771.

Source:

http://www.ilcb.uscourts.gov/sites/ilcb/files/opinions/In%20re%20Davis%20opinion.pdf

Illinois Creditors Bar Association Chicago Bar Association Illinois State Bar Association
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