A chapter 13 debtor’s post-petition contributions to his qualified retirement account may be deducted from the calculation of his projected disposable income and the amount of those contributions is presumed to be the average contribution made during the six months preceding bankruptcy. Where, as here, the debtor substantially increased his contributions on the eve of bankruptcy, he bears the burden of proving that his projected disposable income calculation should be reduced by the increased retirement account contributions. In re Huston, 2021 WL 4528883 (Bankr. N.D. Ill. Sept. 30, 2021) (case no. 20-81689). [Read more…] about Pre-Petition Increase in Retirement Account Contributions
Sixth Circuit Addresses 401(k) Contributions
The Sixth Circuit held that “the bankruptcy code’s text does not permit a Chapter 13 debtor to use a history of retirement contributions from years earlier as a basis for shielding voluntary post-petition contributions from unsecured creditors. This is true even if the debtor had no ability to make further contributions in the six months preceding filing; the code makes no exception for such circumstances.” Penfound v. Ruskin (In re Penfound), No. 19-2200 (6th Cir. Aug. 10, 2021). [Read more…] about Sixth Circuit Addresses 401(k) Contributions
Sixth Circuit Says Contributions to Retirement Plan Not Disposable Income
Rejecting its dictum to the contrary in Seafort, the Sixth Circuit held that a debtor’s voluntary contributions to her retirement account, begun prior to bankruptcy, may continue during bankruptcy and are excluded from her disposable income. Davis v. Helbling (In re Davis), No. 19-3117 (6th Cir. June 1, 2020).
Ms. Davis had approximately $200,000 in debt of which approximately $189,000 was unsecured. She proposed a chapter 13 plan paying $323.00 for sixty months. The trustee objected on the basis that she underrepresented her disposable income by failing to include $220/month in wages withheld as a contribution to her employee 401(k) retirement plan. The bankruptcy court reluctantly sustained the trustee’s objection, stating that it was bound to follow the Sixth Circuit’s direction on the issue of voluntary contributions to an IRA as set forth in dictum in Seafort v. Burden (In re Seafort), 669 F.3d 662, 674 n.7 (6th Cir. 2012). Ms. Davis amended her plan to reflect the $220 as additional disposable income then objected to her own plan. The bankruptcy court confirmed the amended plan and certified the case for direct appeal. [Read more…] about Sixth Circuit Says Contributions to Retirement Plan Not Disposable Income
Fourth Circuit Side-Steps Retirement Contribution Issue
Finding that the trustee did not raise the statutory issue of whether and when a chapter 13 debtor may make voluntary contributions to his retirement account, the Fourth Circuit found no clear error in the bankruptcy court’s factual finding of good faith. Gorman v. Cantu (In re Cantu), No. 17-1034 (4th Cir. Dec. 18, 2017) (unpublished).
Ricardo Cantu’s chapter 13 plan proposed to pay $51,240 toward his $148,346 unsecured debt over five years. The plan payments were based on a disposable income calculation which contemplated $338 in monthly repayments to two retirement accounts which Mr. Cantu had taken out against his government-backed Thrift Savings Plan. The trustee argued that one of the loans from the TSP would be paid off shortly after commencement of the plan, and applying the forward-looking approach, the anticipated reduction in retirement contributions should be considered in calculating Mr. Cantu’s disposable income. The trustee also objected to Mr. Cantu’s inclusion of domestic support payments in the amount of $1,625 per month, when his divorce decree ordered monthly payments of $1,500. Mr. Cantu countered that once he paid off the loan from the TSP he intended to resume making contributions in the same amount to that Plan. He also maintained that the discrepancy between the divorce decree and his actual payments was a result of a scrivener’s error in the divorce decree.
With respect to Mr. Cantu’s voluntary contributions to his retirement account, the bankruptcy court adopted the majority view that such payments may be deducted from the disposable income calculation under section 1325(b), so long as they are made in good faith. The court rejected the two contrary approaches under which 1) voluntary retirement contributions may be made only if they were being made prior to bankruptcy and in the same amount, and 2) voluntary contributions are prohibited in all circumstances. The court then addressed the factual issues of whether the contributions were proposed in good faith and whether the domestic support payments were accurate. The court resolved both issues in Mr. Cantu’s favor. In re Cantu, 553 B.R. 565 (Bankr. E.D. Va. 2016). The district court affirmed.
On appeal, the Fourth Circuit side-stepped the statutory issue of which approach to voluntary retirement plan contributions to adopt, concluding that the trustee did not appeal the bankruptcy court’s application of the majority view, but instead, limited his argument to whether the bankruptcy court correctly resolved the factual issue of good faith. The circuit court found that the bankruptcy court did not commit clear error. Mr. Cantu had been making regular contributions to his TSP until he was forced to stop when he took out hardship loans against the account. In addition, the amount of his contributions was far less than the allowable contribution amount.
The court also found that the bankruptcy court did not commit clear error in accepting Mr. Cantu’s testimony, supported by a pre-divorce Separation Agreement, that the divorce decree did not accurately reflect the agreement between the ex-spouses.
Finding that the bankruptcy court’s factual conclusions were supported by the evidence, the circuit court affirmed.
Judge Thacker concurred in part and dissented in part. She maintained that the trustee in fact raised the issue on appeal of whether and when a debtor may make voluntary contributions to a retirement account, and the court should have taken the opportunity to take a position on the issue. With respect to the domestic support payments, Judge Thacker opined that the bankruptcy court was bound to apply the only court-ordered payments, to wit: those specified in the divorce decree, and that it overstepped by applying, instead, an amount not reflected in that document.