In Re Seafort, debtor filed for Chapter 13 relief on November 20, 2008, in Kentucky. Although she was eligible to participate in her employer’s 401K qualified retirement plan, she was not making any contributions to the plan when she filed for bankruptcy. She was, however, repaying a loan from the retirement plan at the rate of $254.71 monthly. Debtor proposed a 60 month plan. After her 401K loan was repaid in the 19th month of the plan, the debtor intended to begin making 401K contributions of $254.71 a month. The trustee objected to confirmation of the plan because the debtor did not increase her plan payments by $254.71 per month beginning in the 20th month of the plan. Why I am not surprised? The bankruptcy court confirmed the plan over the trustee’s objection. The court held that “participation in a 401K plan is an ongoing endeavor, and while loan payments may take the place of contributions for the life of the 401K loan, the income stream that funds both loan payments and plan contributions is the same.” The court concluded that because Section 541(b)(7) excludes contributions to a 401K plan from property of the estate and disposable income, debtors are allowed to exclude their proposed 401K contributions from disposable income at any point in time. A divided 6th Circuit Bankruptcy Appellate Panel reversed. The majority read Section 541(a)(1) and (b)(7) together and concluded that exclusions from property of qualified retirement plan only apply to those cases where a debtor is contribution as of the commencement of the bankruptcy case. The 6th Circuit AFFIRMED.

This means that while payments on 401K loans are excluded from projected disposable income, once those payments have concluded, the income that becomes available to debtors must be turned over to the trustee for distribution to unsecured creditors.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.