Lefkovitz & Lefkovitz
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401(k) contributions deductible in Chapter 13 repayment

Many Tennessee residents understand the importance of saving for retirement. One of the most popular ways to do that, having a 401(k) retirement plan, was recently the subject of a decision rendered by a U.S. bankruptcy judge. The ruling allows people who are in Chapter 13 bankruptcy to deduct contributions to their 401(k) from their repayment plan, even if they haven't made those contributions within six months.

Rather than necessitating the liquidation of assets, Chapter 13 bankruptcy instead requires that the debtor pay off some of their debt under a payment plan that lasts three to five years. The debtor's disposable income is calculated and must be committed to the payments. In calculating disposable income, expenses are deducted.

The 401(k) ruling by an Illinois judge came about when a couple wanted to deduct the husband's 401(k) contribution from their disposable income. The bankruptcy trustee objected on the grounds that the couple had not made a contribution to the 401(k) in the six months prior to filing. The judge ruled that 401(k) contributions are fully deductible and that there was no showing of bad faith on the part of the debtors in wishing to deduct the contributions. The court said that its ruling was consistent with the rulings of other courts, and that its decision is consistent with encouraging retirement savings.

Chapter 13 is often chosen by people who don't qualify for Chapter 7 liquidation bankruptcy. Filing for any type of bankruptcy puts an automatic stay in place, which is a legal stop to collection efforts. Under an automatic stay, debt collection calls, wage garnishment, foreclosure and most other collection efforts are not allowed. An attorney could help a client understand the other legal aspects of filing for bankruptcy.

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