On an issue where there is a dearth of appellate authority, District Judge Elizabeth Erny Foote of Shreveport, La., sided with the majority of bankruptcy courts by holding that voluntary post-filing contributions to a 401(k) plan are not included in a chapter 13 debtor’s calculation of disposable income so long as the contributions do not exceed the amounts allowed by the Internal Revenue Service.
The appeal demonstrates the obstacles that the Supreme Court erected in Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (S. Ct. 2015), to appeals from orders denying confirmation of chapter 13 plans.
The husband and wife debtors filed a chapter 13 plan where the husband would make voluntary 401(k) contributions throughout the life of their five-year plan, deducting the payments from the calculation of disposable income in determining the amount to be paid to creditors. The bankruptcy judge denied confirmation, because the contributions represented 12% of the husband’s gross income. However, the bankruptcy judge said he would confirm a plan with a 3% contribution.
The bankruptcy judge confirmed the plan after the debtors amended their plan by reducing the 401(k) contribution to 3%. The debtors then appealed confirmation of their own plan. The debtors could not appeal from denial of their first plan because Bullard holds that denial of confirmation is not a final order.
Reversing the bankruptcy court’s limitation on retirement plan contributions in her May 23 opinion, Judge Foote meticulously laid out the legislative quagmire on the question of whether 401(k) payments can be deducted from the calculation of disposable income in Section 1325(b)(2)(A). Statutory interpretation is further complicated by the hanging paragraphs added to Section 541(b)(7) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Courts have three answers to this question. Judge Foote said that a majority allow debtors to shelter contributions not exceeding the limits allowed by the IRS. A second group of courts do not allow deductions for retirement plans, and the third permits contributions not larger than the debtor was making before filing.
Judge Foote followed the majority approach, because she read the plain meaning of the statute as demonstrating “that Congress intended to exclude retirement contributions from available disposable income as defined by the code in Section 1325(b).”
Judge Foote had another holding of significance for debtors, stemming from the bankruptcy judge’s finding that the plan was not filed in good faith given the size of the retirement plan contributions.
Judge Foote held that “the amount contributed by a debtor within the legal limits established by the Internal Revenue Service cannot be the sole basis for determining that a plan has been filed in bad faith.” She remanded the case for the bankruptcy judge to make a redetermination of good faith based on the appropriate Fifth Circuit standard.
We recommend reading the opinion in full text for Judge Foote’s thoughtful analysis of the statute and case law on all sides of the issue. The opinion is available at 2018 U.S. Lexis 86761 or 2018 BL 183240.
Editorial comment: Now that traditional employer-sponsored pensions are rapidly disappearing and being replaced by 401(k)s, courts that effectively prohibit or limit voluntary pension contributions are sentencing debtors to poverty in their retirements. This writer doubts that Congress intended for the effects of chapter 13 to persist so long after the completion of plan payments. (The foregoing commentary reflects the opinion of the writer, not ABI.)