By: Dean A. Langdon
Chapter 13 bankruptcy (in or outside of Kentucky) is meant to offer debtors the opportunity to keep property they might lose in a Chapter 7 bankruptcy by paying their creditors over 3 to 5 years. The trade-off is turning over all “projected disposable income” to pay creditors over the life of a plan. “Disposable income” consists of all “current monthly income” measured by looking backwards for 6 months, less reasonable living expenses. Is funding a retirement plan a reasonable living expense?
Historically, many bankruptcy courts did not consider retirement contributions to be a reasonable living expense and required Chapter 13 debtors to stop making contributions and use that money to pay creditors. In 2005, Congress amended the bankruptcy laws and excluded money withheld by an employer for most retirement plans from a bankruptcy estate. Congress was not crystal clear about this, and while the majority of courts interpret the law to allow Chapter 13 debtors to make retirement contributions, others (including the Sixth Circuit Court of Appeals, which covers Kentucky) have held that debtors could only continue making contributions they were making before bankruptcy, not start or increase them. Seafort v. Burden (In re Seafort), 669 F.3d 662 (6th Cir. 2012); Davis v. Helbling (In re Davis), 960 F.3d 346 (6th Cir. 2020).
Recently, the Sixth Circuit made it clear that a Chapter 13 debtor had to have been making retirement contributions in the 6 months prior to filing bankruptcy in order to continue those payments after bankruptcy. Penfound v. Ruskin (In re Penfound), Case No. 19-2200, August 10, 2021. Mr. Penfound made regular retirement contributions for approximately 20 years, until 2017, when he changed jobs. His next employer did not offer a retirement plan, and Mr. Penfound changed jobs again in May, 2018, with an employer that did offer such a plan. The Penfounds filed Chapter 13 in June, 2018 and proposed contributing over $1,300 per month to Mr. Penfounds retirement plan. After losing in the bankruptcy court and district court, the Penfounds appealed to the Sixth Circuit, which held such payments were not allowed under the circumstances. The basis for the Court’s decision was that “current monthly income” was specifically tied to the 6-month period prior to filing bankruptcy, and because Mr. Penfound had not made any such contributions during that time, he could not start making contributions once he filed Chapter 13.
The moral of the story is that this is one of the many factors to consider if you may need the relief bankruptcy provides, and if you have not been able to make regular retirement contributions for 6 months, it may be worth waiting to file if you can resume those contributions, in order to continue making them while also paying creditors through a Chapter 13.
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