Your 401(k) and Bankruptcy

: Chris Lee Law Firm

  Filed under: Bankruptcy

401k-1Retirement funds and 401(k) account monies are generally exempt from liquidation in a bankruptcy filing. This rule applies mostly to Chapter 7 cases in which some of a person’s assets could be used to satisfy debts to creditors. In a Chapter 13 case, these funds are also generally excluded from the proceedings except for when they influence the amount of disposable income that is considered as part of the debt repayment plan.

Disposable Income

A debtor’s disposable income is the main factor used to determine how much a debtor may be required to repay as part of their Chapter 13 case. Although retirement funds do not count towards disposable income, they can be influential if a 401(k) loan or contributions are involved. A recent bankruptcy case, Seafort v. Burden, involved a bankruptcy filer who was paying money back into their 401(k) loan at the time of filing for Chapter 13 bankruptcy. As the case was proceeding the loan was satisfied, freeing up additional income to be recalculated into a higher level of disposable income.

Claiming the 401(k)  loan repayment freed up disposable income once repaid, the Trustee felt the Chapter 13 repayment plan should be revised to include this higher level of disposable income. The debtor disputed this action, to which a Sixth Circuit Court of Appeals judge upheld the motion made by the Trustee. This case has brought up some important clarification about the role of retirement funds in Chapter 13 proceedings, which basically holds that if there are no active 401(k) contributions at the time of case filing there cannot be any future contributions initiated until the Chapter 13 case has been successfully completed. In other words, debtors cannot use their 401(k) as an avenue for lowering their disposable income by making contributions after the bankruptcy case has begun.




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