Following the majority of courts and rejecting a holding by the Sixth Circuit, District Judge Beth Bloom of Miami upheld the bankruptcy court and allowed a chapter 13 debtor to make $114,000 in contributions to a retirement plan over the course of his five-year plan and not include the payments in calculating how much the debtor must pay creditors.
As a result, the debtor’s post-petition contributions to his retirement account will be almost 10 times larger than the payments to creditors under his chapter 13 plan.
In the five years before bankruptcy, the debtor contributed a total of $77,150 to a tax-deferred annuity. An unsecured creditor with a $60,000 judgment objected to confirmation of the chapter 13 plan, contending that the contributions to the retirement account should have been — but were not — included in the calculation of disposable income under Section 1325(b)(2).
Even if the contributions were properly excluded from the calculation, the objecting creditor argued that the plan was not filed in good faith and could not be confirmed because the debtor was only paying creditors about $12,000 under the plan. Bankruptcy Judge John K. Olson of Fort Lauderdale, Fla., rejected the arguments and confirmed the plan.
In her Sept. 29 opinion, Judge Bloom laid out the three schools of thought. She said that the majority holds that a chapter 13 debtor may exclude voluntary contributions to a retirement plan from the disposable income calculation so long as the plan is proposed in good faith.
The minority approach, adopted by the Sixth Circuit, requires inclusion of the contributions in the disposable income calculation. Judge Bloom said that the Sixth is the only circuit to have addressed the question.
The third approach allows the deductions only if they were consistent with retirement-plan contributions before bankruptcy.
In Judge Bloom’s view, the case turned entirely on Section 541(b)(7), adopted in 2005 as part of the BAPCPA amendments. That section excludes retirement-plan contributions from the estate and includes a so-called hanging paragraph that says that such contributions “shall not constitute disposable income as defined in Section 1325(b)(2).”
Adopting the majority view and allowing the deduction, Judge Bloom criticized the Sixth Circuit for relying on the placement of Section 541(b)(7) outside of chapter 13. She said that the section makes no distinction between pre- and post-petition contributions. Moreover, the section is “subsumed” within Section 1306.
In addition, she saw no statutory basis for allowing contributions only if the debtor was making them before bankruptcy.
On the question of good faith required by Section 1325(a)(3) and (a)(7), Judge Bloom considered the debtor’s age. Because he was near retirement, she said there was “nothing unusual about” making voluntary retirement plan contributions. “Equity dictates that a debtor who is on the verge of retirement should be allowed to continue making voluntary contributions to a retirement account. Otherwise, the debtor would be deprived of the ability to obtain a fresh start.”
Judge Bloom upheld confirmation because the bankruptcy court’s finding of good faith was not clearly erroneous.