In a recent case, a bankruptcy court had to consider whether to allow a debtor in a Chapter 13 plan to make voluntary contributions to her pension plan.
This is an interesting and important question, especially for retirement planning and retirement preparation. Indeed, saving in an employer-sponsored retirement plan with the attendant benefits – such as employer matching contributions and tax deferral – is an important tool in personal financial planning. And the earlier you start saving, the more time capitalization and growth have to help you reach your goals.
In the case, with respect to the issue of the pension plan, an unsecured creditor objected to the proposed payment plan, arguing that the plan was not offered in good faith because the debtor failed to devote all of his or her disposable income for the plan. As such, the creditor argued that voluntary pension contributions should not be allowed to the detriment of creditors. In short, if the court refused the voluntary pension contributions, thousands of additional dollars would be paid to the trustee (and made available to creditors).
When an application for bankruptcy is filed, a bankruptcy estate is created, which includes all of the debtor’s assets (unless the law excludes them). In a Chapter 13 bankruptcy – in which the debtor makes payments over a period of time – the bankruptcy assets also include property and earnings acquired until the case is closed, dismissed, or converted.
As the court explained, under section 1325 (b), if the trustee or an unsecured creditor objects, then either all claims must be paid in full or the plan must provide that “all the projected disposable income”Be committed to the plan. (I underline).
As relevant here, disposable income is the debtor’s current monthly income less some reasonably necessary expenses. In particular, as the court explained, there is no article which “explicitly authorizes pension contributions as an eligible expense in the calculation of disposable income”.
However, Section 541 (b) of the Bankruptcy Code (11 USC) provides exceptions to the ownership of the estate, which includes, among other things, amounts withheld by an employer from wages or received by an employer from employees. as contributions to certain retirement plans. In both subparagraphs (section 541 (b) (7) (A) and (B)), the law provides that “except that this amount referred to in this subparagraph does not constitute disposable income, as defined in article 1325 (b) (2). . . . The court explained that those parts “except” – which are now known as the “suspended paragraph” – gave rise to three competing interpretations.
A previous bankruptcy case –In re Cantu, 553 BR 565, 572 (Bankr. ED Va. 2016) – summarizes the three interpretations. First, the debtor is not entitled to any deduction for voluntary contributions, regardless of his behavior before the bankruptcy. Second, voluntary pension contributions can be made, as long as this corresponds to the behavior of the debtor before the request. Third, the debtor can make voluntary pension contributions if they are made in good faith; this is the view of the majority.
Here, the bankruptcy court followed the majority approach.
In considering the good faith requirement, the court noted that it had taken into account all of the circumstances. The court noted that some factors to consider were the debtor’s age in relation to early retirement and whether it would be unreasonable to reduce pension contributions during the life of the plan.
The court noted that although the debtor was in her thirties, she had a retirement planning record prior to the petition and the proposed pension contributions were within the limits of the qualifying plan. In addition, although the full sum of unsecured claims would not be paid, a substantial portion of these would be paid under the plan.
Thus, the court concluded that the plan had been proposed in good faith and confirmed it with the granting of voluntary pension contributions.
The case is In re Pizzo, No. C / A No. 20-01758-HB (Bankr. DSC May 20, 2021).
This is only a summary of the case and some parts – including facts, questions, quotes or analysis – may have been omitted or changed; if you need advice in this area, please review the entire case and consult a lawyer.