I filed Chapter 13 Bankruptcy in Orange County, Can I Contribute to My 401k?

Many clients ask whether their 401k or retirement contribution can be used as an expense when determining their Chapter 13 plan payment.  When you file Chapter 13 bankruptcy, you must list all of you income and expenses on the bankruptcy documents.  Your attorney will use these numbers to determine your disposable income.  In most Chapter 13 cases, your disposable income is used to determine whether Chapter 13 plan is feasible and/or the amount of Chapter 13 monthly payment plan itself.

Income and Expenses Used to Determine Disposable Income

Your attorney will complete the “Means Test” to determine your Disposable Monthly Income, or DMI for short.  The DMI is then used to help determine how much your monthly Chapter 13 plan payment will be and/or whether your Chapter 13 plan payment will be feasible.   To complete the means test, your attorney will use your income, actual necessary living expenses as well as the national and local living standards.

Can I use my 401k or Retirement Contributions as “Means Test” Deduction?

When calculating the means test, your living expenses such as taxes, healthcare, childcare, charity and mortgage will be used to determine your DMI.  Your disposable monthly income must be contributed towards your Chapter 13 payment.  However, your contributions towards your 401k or retirement is NOT considered a necessary living expense that can be used in the means test to compute your DMI.

Are my 401k loans an expense?

In the Central District of California, many courts will allow you to pay back your 401k loans.  The amount paid each month is deducted from your disposable monthly income and can be used as an expense on the means test.  However, in most cases, when the loan is paid off during your Chapter 13 plan, the trustee will require you to pay your excess income towards your Chapter 13 plan.  For example, if you pay off your 401k loan which was $500 per month, than your Chapter 13 plan payment will raise by $500.  It is always a good idea to discuss your 401k contributions and loans with your bankruptcy lawyer for more information.