Over a dissent, the Fourth Circuit ducked a golden opportunity for deciding whether a debtor can propose a chapter 13 plan that deducts retirement plan contributions from disposable income, thereby reducing payments to creditors.
The debtor proposed a plan that would give creditors a recovery of slightly more than one-third on $150,000 in unsecured claims. In calculating disposable income, the 38 year-old debtor proposed deducting about $340 a month as a contribution to the only retirement plan for which he was eligible.
In response to the chapter 13 trustee’s objection to the pension plan deduction from disposable income, the bankruptcy judge described how the courts divided into three camps.
The majority allow retirement contributions, subject to a showing of good faith. Courts in the middle allow contributions, but no more than the debtor was making at filing. Led by the Sixth Circuit, the third group disallows all voluntary post-petition contributions. Seafort v. Burden (In re Seafort), 669 F.3d 662 (6th Cir. 2012).
The bankruptcy judge took the majority approach, found good faith, and confirmed the plan. After the district court affirmed, the trustee appealed to the Court of Appeals.
Writing for the majority, Circuit Judge Pamela Harris said that the Fourth Circuit had not decided whether or how much a chapter 13 debtor can contribute to a pension plan. In her non-precedential opinion on Dec. 18, Judge Harris said there was no need for ruling on the propriety of pension plan contributions in chapter 13.
Judge Harris interpreted the trustee’s appeal as only challenging the bankruptcy court’s finding of good faith. She then ruled that the bankruptcy court did not commit clear error because the debtor would only contribute $3,200 a year when the maximum permissible contribution under tax law would be $18,000. She also said that the debtor was in good faith by resuming contributions after paying off a loan from the retirement plan.
Circuit Judge Stephanie D. Thacker agreed that the debtor proposed the plan in good faith, but she disagreed with the majority’s decision to duck the question of statutory interpretation. In the briefs and at oral argument, she said the trustee had raised the issues surrounding Sections 541(b)(7) and 1325(b).
Section 541(b)(7) excludes contributions to qualified retirement plans from estate property, while Section 1325(b)(2) describes allowable deductions from “disposable income.”
Without indicating which of three camps she favored, Judge Thacker said that the issue affects thousands of current and potential debtors in the Fourth Circuit. She also noted that the question has been answered in only one circuit, with the Sixth Circuit holding in 2012 that post-petition retirement plan contributions are never permitted.
Click here to read ABI’s discussion about a decision from September by a district judge in Florida who rejected the Sixth Circuit’s holding and adopted the majority approach by upholding confirmation of a chapter 13 plan where contributions to a retirement plan would be 10 times more than payments to creditors. The Florida opinion was not appealed to the Eleventh Circuit.