Bankruptcy Court Allows Voluntary Retirement Contributions In Chapter 13 Plan
In a recent case, a bankruptcy court had to determine whether to allow a debtor under a Chapter 13 plan to make voluntary contributions to his pension plan.
This is an interesting and important question, especially for retirement planning and retirement preparation. Indeed, saving in an employer-sponsored retirement plan with the attendant benefits, such as employer matching contributions and tax deferral, is an important tool in personal financial planning. And the earlier you start saving, the more time capitalization and growth have to help you reach your goals.
In the case, with respect to the issue of the pension plan, an unsecured creditor objected to the proposed payment plan, arguing that the plan was not offered in good faith because the debtor did not. not spending all of his disposable income. As such, the creditor argued that voluntary pension contributions should not be allowed to the detriment of creditors. In short, if the court rejected the voluntary pension contributions, thousands of additional dollars would go to the trustee (and be available to creditors).
When a bankruptcy petition is filed, a bankruptcy estate is created, which includes all of the debtor’s assets (unless excluded by law). In a Chapter 13 bankruptcy – in which the debtor makes payments over a period of time – the bankruptcy estate also includes property and income acquired until the case is closed, dismissed, or converted.
As the court explained, under section 1325 (b), if the trustee or an unsecured creditor objects, then either all claims must be paid in full or the plan must provide that ” all projected disposable income”Be committed to the plan. (I underline).
As relevant here, disposable income refers to the debtor’s current monthly income less some reasonably necessary expenses. Notably, as the court explained, there is no article that “explicitly authorizes pension contributions as an eligible expense in the calculation of disposable income”.
However, Section 541 (b) of the Bankruptcy Code (11 USC) sets out exceptions to the ownership of the estate, which include, among other things, amounts withheld by an employer from wages or received by an employer from employees. as contributions to certain retirement plans. In the two subparagraphs (section 541 (b) (7) (A) and (B)), the law provides that “except that this amount under this subparagraph does not constitute disposable income, as defined in section 1325 (b) (2). . . . The court explained that those parts ‘except that’ – which became known as the ‘suspended paragraph’ – gave rise to three competing interpretations.
A previous bankruptcy case—In re Cantu, 553 BR 565, 572 (Bankr. ED Va. 2016) – summarized the three interpretations. First, the debtor is not entitled to any deduction for voluntary contributions, regardless of his behavior before the bankruptcy. Second, voluntary pension contributions can be made, provided this is consistent with the behavior of the debtor prior to the petition. Third, the debtor can make voluntary pension contributions if they are made in good faith; it is the opinion of the majority.
Here, the bankruptcy court followed the majority approach.
In considering the good faith requirement, the tribunal noted that it had taken into account all of the circumstances. Some factors to consider, the court noted, were the age of the debtor in relation to early retirement, and whether it would be unreasonable to reduce pension contributions during the scheme.
The court noted that although the debtor was in her thirties, she had a history of retirement planning prior to the petition and that the proposed pension contributions were within the limits of the qualifying plan. In addition, even if all of the unsecured debts would not be paid, a substantial portion of them would be paid under the plan.
Thus, the court concluded that the plan was proposed in good faith and confirmed the plan with the allocation of voluntary pension contributions.
The case is In re Pizzo, No. C / A No. 20-01758-HB (Bankr. DSC May 20, 2021).
This is only a summary of the case and some parts, including facts, issues, quotes or analysis, may have been omitted or changed; if you need advice in this area, please review the entire case and consult a lawyer.