401K Contribution Question

I've been doing a ton of research both on this site, and cornell law, and I see a lot of conflicting information. My question is basically can I contribute to my 401K and deduct the amount from my my DMI? On this site, it appears the question is arbitrarily answered by your district's court. But in the bankruptcy code it seems very black and white. In Chapter 5, subchapter III, the following is stated... (I've excerpted what I think is the relevant info).

(b) Property of the estate does not include—

(7) any amount—

(B) received by an employer from employees for payment as contributions—

(i) to—
(I) an employee benefit plan that is subject to title I of the Employee Retirement Income Security Act of 1974 or under an employee benefit plan which is a governmental plan under section 414(d) of the Internal Revenue Code of 1986;

except that such amount under this subparagraph shall not constitute disposable income, as defined in section 1325 (b)(2); or

Okay, I'm certainly not a lawyer, but this really seems very black and white. If I'm reading this right, ANY AMOUNT I contribute to a 401K SHALL NOT constitute disposable income in section 1325 which deals with confirmation of chapter 13 plans.

I don't see anything that says I need to be making those contributions for X number of months prior to filing, etc.

Can someone explain to me why this isn't as black and white as I'm seeing it? I've discussed with my lawyer, and he says the trustee doesn't have an issue with 401K contributions if they've been made consistently in the past. I just don't understand how that's even relevant here. Please help me understand.

According to the new bankruptcy laws you are allowed to continue contributing to your 401k plan.

If your attorney says the trustee is ok with it, then what more do you need to know?

Im not too sure about the X number of months thing, it might just be the trustees personal preference, which may be fought in court if you so choose to.

He wants to make sure your not all of the sudden gonna start contributing to the 401k to get out of disposable monthly income that would go to the creditors. Which, that would be his argument in court, and would be left with the Judge to decide.

Most people are in such financial disaster before they file Chapter 13 that the majority have already stopped contributing to 401(k)'s and cannot save a penny. They have no money to save and maybe want to keep their house and are able to file a Chapter 13. Whether or not those people would be able to carve out money to save in a Chapter 13 is something that would need to be discussed with their attorney. Our concern at that time was not what we could save but how we could get out of the mess we were in. I had stopped contributing during the year prior to our filing cause we needed the extra money. When we were in our Plan about two years I asked our attorney if I would be able to contribute to my 401(k) since I had changed employers and they matched 100% up to 6% of contributed funds. I was told a small percentage would be OK and to stop it if interferred with making our Plan or any other bills while in the Plan. I contributed 1% so it would not affect our already tight household budget.

When it comes to 401(k) funds, I would discuss the situation one on one with one's attorney because if you are in financial disaster, saving 6% or any other percentage your employer may match into a 401(k) plan just may not be possible.

fyi....Many bk local courts set a maximum amount that can be contributed to a 401K when you are in Ch 13. For example, our trustee with the blessing of our local court judge allows a maximum of 5% of each Ch 13 filer's total gross income can be contributed towards retirement. Otherwise, it's possible that every filer would maximize retirement contributions to the level that they would have no disposable income and be able to file Ch 7 and "beat the system".

About retirement contributions and paying back retirement loans at the same time.... We ended up as a test case for this in our bk district. My husband took out several loans against his retirement before we filed which we were paying back, and we also wanted to continue to contribute to our 401Ks as well. We indicated such on our B22C forms when we filed in 2006.

Our trustee said this was "double-dipping" by paying ourselves back with disposable income rather than paying that money to our creditors and still taking more disposable income to continue retirement contributions as the law allows. He filed an objection against confirmation contesting this. After briefs were filed by our lawyer and our trustee, we then had a hearing in front of our local bk judge. Our judge ruled that the trustee's interpretation was wrong. We were allowed to continue paying back our 401K loans *and* also continue to make retirement contributions up to 5% of our gross incomes each for the life of our plan. A victory for us and for others who can now use the case law from our situation to bolster doing the same thing when they file :)

I stopped contributing to my 401K a couple years ago in order to help make ends meet. But it would appear that the bk code would allow me to begin to contribute again instead of paying that money to unsecured creditors.

It seems very black and white to me, and I find it fascinating that it's handled differently all over the place.

Whether you can, and the amount of 401(k) contributions is still under litigation and scrutiny, although the new BAPCPA 2005 Code says that you can. The bankruptcy code doesn't say how much though. :)

There are Trustees who believe that you cannot contribute. This is just wrong.

There are Trustees who limit how much you can contribute. This is just wrong.

The real deal is that you should be able to contribute the maximum "non-taxable" amount each year. Congress, when they added the language, didn't indicate a percentage either.

I contribute 10% to mine, and had no issue with the Trustee... and I'm in a 0.2% plan. :) No creditor bothered me either.

I think in most cases, where there is pushback, it comes from the Trustee!