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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • IN RE PARKS: The End of 401k Deductions in Chapter 13 Bankruptcy?

    file0002131223244-thumb-375x281-49371A recent Appeals Court has ruled that a Chapter 13 bankruptcy debtor can’t continue to take paycheck deductions for a 401k account (In Re Parks, Case No. 11-60050 (9th Cir. Bap Aug. 6, 2012)The Court also decided that a 401k-loan deduction could continue during the plan. Courts across the Nation are still split about whether the 401k contribution can continue after filing the 13, but most Courts agree with each other that 401k loan payments can be used as a continuing budget item.

    In the Parks case, the debtor included the 401k deductions in the means test and on the schedule I, which is a schedule of his income and withholdings from income looking forward in time.

    He had a negative $40.00 on the means test, partially as a result of taking the 401k deductions of $318.00. He had a positive amount leftover to pay all creditors of $886.00 looking forward on schedules I and J (budget).

    Because the Means test was negative, the debtor’s plan proposed a payment of $475.00 per month.

    The Chapter 13 Trustee filed an objection and made the argument that Mr. Parks Shouldn’t be allowed to continue to the 401k deductions and that amount should be included in the plan payment when Bankruptcy Code Sections 541 (b)(7)(A) and 1306 are read together.

    The Appeals Court agreed. It stated that Section 541(b)(7)(a) excludes retirement account payments from the bankruptcy estate, it also excludes the contributions from section 1325’s definition of what is disposable income so the exclusion only should apply to 401k funds ALREADY contributed to the 401k account as of the date of filing.

    Based on this the Court reasoned that the ongoing deductions weren’t covered by Section 541(b)(7)(A) and weren’t allowed.

    Conclusion

    Arizona Bankruptcy Filers may not be able to continue 401k deductions in Chapter 13 Bankruptcy