In dicta, the Sixth Circuit had said in 2012 that voluntary contributions to a 401(k) plan must be paid to creditors in a chapter 13 plan and cannot be deducted from disposable income, even if the debtor had been making contributions before bankruptcy.
That very issue is now sub judice in the Sixth Circuit, giving a new panel the opportunity of deciding whether to turn the dicta into holding or reject the dicta and rule in favor of the debtor.
In an opinion on September 20, a district judge in Michigan found the dicta to be “very persuasive” and upheld a decision by the bankruptcy court disallowing a deduction for voluntary 401(k) contributions.
The facts in the Michigan case would have provided justification for allowing the deductibility of contributions to a retirement plan, if the court were so inclined.
The debtor was 54 years old and planned on retiring at age 62. District Judge Avern Cohn of Detroit said that the debtor “always made” contributions to 401(k) plans at his prior places of employment. In his chapter 13 schedules, the debtor listed contributions of $1,375 a month in a retirement account with his current employer.
Judge Cohn said it “has always been [the debtor’s] intention to continue making voluntary contributions to his retirement account.”
The debtor proposed a plan where unsecured creditors would be paid $22,175, or 5.5%, over five years. During the life of the plan, the debtor planned on making $82,000 in contributions to his retirement plan.
The chapter 13 trustee objected to confirmation, contending that the contributions should not be deducted from disposable income under Section 1325(b)(2)(A)(i). The bankruptcy court sustained the objection, requiring the debtor to modify the plan and direct the contributions instead to creditors.
The debtor appealed but lost.
Judge Cohn squibbed Section 1325(b)(2)(A)(i), which defines disposable income as “current monthly income received by the debtor . . . less amounts reasonably necessary to be expended . . . for the maintenance and support of the debtor.”
Like the bankruptcy court, Judge Cohn cited the Sixth Circuit as principal authority. In re Seafort, 669 F.3d 662 (6th Cir. 2012).
In Seafort, the appeals court laid out the three-way split. Some courts disallow all contributions to retirement accounts; others allow contributions, but only for amounts the debtor was making before bankruptcy; and a third group allows contributions up to the amount permitted by the IRS, but subject to a “good faith” requirement.
Once a loan from a retirement account has been repaid, the Sixth Circuit held in Seafort that the income made available may not be used to make voluntary contributions. In dicta, the appeals court said it did not agree with the assertion that contributions may be deducted from disposable income if the debtor had been making contributions before bankruptcy.
Judge Cohn conceded that the statement was dicta. However, he said “it clearly indicated [the] position [of the Sixth Circuit] on the issues” and upheld the disallowance of deductions from disposable income.
Perhaps urging the debtor to appeal, Judge Cohn said that the “Debtor’s argument is properly addressed to the Sixth Circuit.”
Indeed, the Sixth Circuit will be deciding the issue in a few weeks. In Davis v. Helbling (In re Davis), 19-3117 (6th Cir.), the appeals court accepted a direct appeal to rule on whether a debtor, who had been making 401(k) contributions before bankruptcy, could deduct the contributions from disposable income in calculating payments to creditors under her chapter 13 plan. The appeal was argued on August 8. The debtor was represented pro bono by former ABI president Eugene Wedoff.
A district court in Louisiana last year upheld the bankruptcy court and allowed contributions up to the IRS limits. Miner v. Johns, 589 B.R. 51 (W.D. La. May 23, 2018). To read ABI’s report on Miner, click here.
Observations
In recent years, fewer and fewer employers have been offering pension plans. Increasingly, 401(k)s and IRAs represent a debtor’s sole source of income to supplement meager Social Security benefits in retirement.
Disallowing contributions is equivalent to rendering retirement accounts nonexempt. If contributions are prohibited, bankruptcy will be affecting debtors long after completion of their chapter 13 plans and forcing them to live in greater poverty in old age.
Compared to chapter 7 debtors, individuals in chapter 13 are at a disadvantage, because chapter 7 debtors can make contributions immediately after filing.
Unless the courts uniformly rule that contributions are “reasonably necessary . . . for . . . support,” Congress should address the issue and allow contributions to retirement plans.
The observations are those of the writer, not ABI.
Sixth Circuit to Rule on Deductions for Contributions to Retirement Accounts (Updated)
In dicta, the Sixth Circuit had said in 2012 that voluntary contributions to a 401(k) plan must be paid to creditors in a chapter 13 plan and cannot be deducted from disposable income, even if the debtor had been making contributions before bankruptcy.
That very issue is now sub judice in the Sixth Circuit, giving a new panel the opportunity of deciding whether to turn the dicta into holding or reject the dicta and rule in favor of the debtor.