A common question that bankruptcy lawyers get asked is whether or not a client can continue to make 401(k) contributions during Chapter 13 Bankruptcy. The answer depends on each individuals Chapter 13 case.
The best recommendation, without knowing the circumstances, is to speak to a bankruptcy attorney. An attorney can examine your case and give specific direction on whether or not it is possible to make 401(k) contributions during Chapter 13 Bankruptcy.
Disposable income in a Chapter 13 repayment plan
The purpose of a Chapter 13 Bankruptcy is to restructure debt. The process establishes a three or five year payment plan. Your disposable income goes toward the payment. The amount paid depends on income, assets, expenses and the types of debt.
You and your bankruptcy attorney will determine your disposable monthly income. The bankruptcy trustee makes sure to allocate all disposable income in Chapter 13 repayment plan for the creditors benefit.
Defining disposable income
Income left over after deducting expenses that are reasonably necessary to support the individual and dependents is known as disposable income. This is critical when considering 401(k) contributions. This is due to the fact that contributing towards 401(k) would reduce the available income to pay to creditors.
Typically, courts do not look upon this favorably because putting money into a 401(k) account is essentially saving disposable income for a later date. However, when working with a bankruptcy lawyer there is a possibility to have the courts look at this on a case by case basis.
Retirement contributions reduce your payment capacity
The purpose of a Chapter 13 Bankruptcy is to pay off as much secured and unsecured debt as possible. This makes contributions to a retirement is counter productive. Paying into retirement takes away from your disposable monthly income and the amount creditors receive.
Therefore, the court might not allow you to use your retirement contributions as an expense. On the other hand, since every circumstance is unique, speak with a bankruptcy lawyer to determine your options.
NOTE: This is for informational purposes only and does not constitute legal advice.