By Anerio Altman

Voluntary contributions to retirement are allowed expenses in Chapter 13 Bankruptcies for “below median” debtors if they are reasonable and necessary. Generally a Debtor is not allowed to make voluntary contributions to their retirement during a Chapter 13 if the Debtor’s income makes them a “Below Median Income” filer. There are certain situations in which it is acceptable.

The Means Test in Chapter 13

When a bankruptcy petition is filed, a bankruptcy estate is created, which includes all the Debtor’s property unless otherwise excluded by law.  11 U.S.C. Sec 541(a).  Under Chapter 13, the bankruptcy estate also includes the Debtor’s property and earnings acquired “after the commencement of the case but before the case is closed, dismissed, or converted.”  11 U.S.C. Sec. 1306(a)(1) & (2). 

Section 1325(b) requires that, if the trustee or the holder of an allowed unsecured claim objects to the Debtor’s Chapter 13 plan, the debtor must either pay all allowed claims in full or the plan must provide that “all of the debtor’s projected disposable income” be devoted to the Chapter 13 plan.  11 U.S.C. Sec. 1325(b)(1)(B). 

Debtors can be “above median” or “below median”. If the Debtors’ income is higher than the median income for a household of it size in the county in which they reside, they are considered an “above median” household. If less than the average, they are “below median”.

For above-median debtors, disposable income is measured by the means test contained in Sec. 1325(b)(2),(3), and 707(b).  For below-median debtors, disposable income is only determined by case law that existed prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).

Pre-BAPCPA reasoning is embodied in the current code as the “current monthly income received by the Debtor…less amounts reasonably necessary to be expended…for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation.”  11 U.S.C. Sec. 1325(b)(2). 

In Re Bruce and “reasonably necessary”

Whether an expense is “reasonably necessary” under Sec. 1325(b)(2) is a factual determination by the court.  In Re Bruce 484 B.R. 387, 389 (Bankr. W.D. Wash. 2012); Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4^th Ed. Sec. 165.1 at Sec. 1, Sec. Rev. 6/14/04, www.Ch13online.com.

This reasoning is displayed in the case of In Re Bruce 484 B.R. 387, 389 (Bankr. W.D. Wash. 2012). In the matter of In re Bruce, the Debtor was a below median Debtor with a household of 3, who proposed a 36 month 0% Chapter 13 Plan which allowed for a monthly contribution of $160.33 a month to a retirement account.

The Chapter 13 Trustee in Bruce opposed the Debtor’s plan citing to the case of In Re Parks 475 B.R. 703 (B.A.P. 9^th Cir. 2012) for the proposition that deductions for voluntary retirement are not permitted as allowable deduction as reasonable and necessary.  The court in Bruce  distinguished Parks because the Debtor in Parks was an above median income Debtor, where the Debtor in Bruce was not, and the expense of $160 a month was reasonable and necessary.  

in Bruce the Debtor was allowed a match by his employer for the contribution enhancing the value of the contribution.  There was no objection to the expenses on the Debtor’s Schedule J budget, and the employer offered no other form of pension or retirement.  Bruce, supra 484 B.R. 387, 390.  The court noted that except for the largest employers and government agencies, the cost of traditional pension plans is prohibitive, and that 401(k) plans, TSP’s, and IRA’s have become the primary retirement vehicle for private employees in this country.  Id.

Below median debtors must often address pre-BAPCPA determinations of what is “reasonably necessary” as cases involving that analysis pre-date BAPCPA.  However, historical cases that have held that voluntary contributions to a pension plan were not reasonably necessary were written at a time when employers were more likely to maintain defined benefit pension plans.  Id. 

Post BAPCPA rulings have looked at the code’s considerate treatment of 401(k) contributions.  In Re Smith No. 09-64409, 2010 WL 2400065, 3 (Bankr. N.D. Ohio, June 15^th, 2010)(“The enactment of section 541(b)(7) injected a policy favoring retirement savings into the bankruptcy code.  Therefore, the harsh approach toward 401(k) contributions taken by courts pre-BAPCPA is no longer warranted.”) 

The court in Bruce cautioned that a reviewing court should consider that it is manifestly unfair, and probably a due process violation, to discriminate against poor Debtors making reasonable contributions to a 401(k) plan who may be barred from deducting those amounts in determining disposable income, while similarly situated employees with involuntary contributions to a defined plan are allowed to fully deduct those contributions before determining disposable income.  Bruce, supra.

So below median Debtors can contribute to their retirement plans if such contributions are reasonable and necessary.