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RetirementDeductionsinBankruptcyWhen a debtor asks a bankruptcy professional to figure out what their payments might be in a Chapter 13 Bankruptcy, the bankruptcy attorney should know that deductions taken out of the debtors paycheck may be allowable deductions if the debtor is below the states median income, which will affect the debtors overall payment in a chapter 13 bankruptcy. These same deductions however may not be taken when calculating whether a debtor will qualify for a chapter 7 bankruptcy through the means test. This is also the rule for any loans that have be taken out from allowable retirement accounts. These deductions may be taken up until the loans are paid off, and at that point the chapter 13 payments must be increased to reflect the additional disposable income.

To get a bit more technical with what was stated above, in Washington state, the bankruptcy court for the Western District of Washington decided that chapter 13 debtors with household incomes that are below the median income levels can continue making contributions to 401(k) and other retirement accounts. In re Bruce, Case # No. 11-40939-BDL (Bky.W.D.Wash. Dec. 11, 2012), held that the Ninth Circuit Bankruptcy Appellate Panel decision in In re Parks, 475 B.R .703 (9th Cir.BAP 2012), applied only to above-median income debtors who were subject to the bankruptcy code’s “means test.” The court in Bruce also held that Parks neglected to apply section 541(b)(7)(A)(i) in a manner which would allow chapter 13 debtors to continue such contributions under section 1325(b)(2)’s reasonableness standard. Both the Parks and Bruce case agreed that chapter 13 debtors can continue to repay retirement account loans during the life of a chapter 13 plan. If you are in another state other than Washington, you will want to check with a bankruptcy attorney in your state to find out how the courts have ruled in your area.

If you need assistance with filing your chapter 13 bankruptcy case, please call Symmes Law Group at 206-682-7975

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