Increase contribution in 401K or open a new IRA

[GGupta]

I am planning to increase my contribution in 401K from 6% to 20% and also open a new IRA account..
I might have to file for bankruptcy in April'10 or later.. I am wondering if increasing the contribution to 401K or opening a new IRA will be exempt to bankruptcy or not?
I am in WA state and I will likely use federal exemption if I do end up filing bankruptcy..
The bankruptcy will likely be Chpater 13 becoz my income is more then the median income but it could be Chapter 7..
but I will only know in March if I will file for bankruptcy or not.. I am expecting a payment from a person who promised that in Feb. IF he gives me that payment, I will not file for bankrupcty otherwise bankruptcy is 100%.
the amount of unsecured debt I will have is about 50K for the bankrptcy..

Question: If I open a new IRA (in addition to current 401K) or If i increase my 401K contribtion, will it be safe for bankruptcy in 7 months from now or so..

Ofcourse, if I get my payment, then this doesnt matter.. This is more of what if question...

[lrprn]

The bankruptcy will likely be Chpater 13 becoz my income is more then the median income but it could be Chapter 7..

Question: If I open a new IRA (in addition to current 401K) or If i increase my 401K contribtion, will it be safe for bankruptcy in 7 months from now or so...

If you file Ch 7, then it depends on how your local court and trustee will interpret this much higher than normal increase in your contributions within a year of filing. It might be seen as an attempt to fraudulently reduce your disposable income before filing, or it might not.

However, in a 2008 decision in Wisconsin In re Mravik, 2008 WL 5423108 (Bankr. E.D. Wis. Dec. 31, 2008), the court noted that the debtor’s retirement plan contributions represented a reasonable proportion of his income, the debtor’s lifestyle was not extravagant, and Congress specifically decided that such retirement plan contributions do not constitute disposable income available to the debtor. The Court held that in this case, the debtor’s budget was reasonable and that the debtor’s chapter 7 case would not be dismissed as an abuse.

In your case, the key is going to be if abruptly increasing 20% of your income to retirement within a year of filing will be seen as "a reasonable proportion" of your income. 20% is an abnormally high retirement contribution for someone who is truly in financial trouble.

If you file Ch 13, it also depends on your local court and trustee interpretations (again the potential for filing in bad faith might come into play), plus case law decisions related to retirement contributions during Ch 13 now come into play as well.

Most local courts allow retirement contributions but may restrict the amount of contributions made during an active 13 plan (we were capped at 5% in our case), a few don't restrict it, and a few trustees and local bk judges still try to not allow retirement contributions at all during an active 13.

Before upping your retirement contributions to such a high level, you need to ask experienced bk lawyers in your area during free initial consultations what to expect around your retirement contributions if you do file.

[GGupta]

So, what if I increase the contribution now.. I am expecting year end bonus in Dec so it will help put some decent money in 401K?
Then from Jan, I can reduce it back to 6% as it is now.
If I have to file bankrupcty, it will only be in April or so so if they primarily look into last 3 months, it will not have much contribution 6%?

What if I open a IRA (roth or something similar) now in Sept for 10K and then do NOT make further contribution from Oct to April after opening it. Will that be safe in bankruptcy?

Thanks..

[jribe]

I know there was another poster on here a few months ago that had this same issue. And was actually dismissed as i recall because the trustee said that if he was making a normal contribution of 6% instead of what he was doing- he would be able to make his payments.

I would be very careful in doing this. The pro is that the actual money in the account will be exempt- so that big bonus- most of it would go into your 401k.

The downside is that the trustee may not allow such a high percentage for your means test- and defintily not for your schedules. 401k deductions are NOT taken out of your income for qualification on either the means test or schedules.
Only mandatory deductions from payroll is allowed; and 401k's are voluntary.

I would do research on your own for your state and district.

I am planning to increase my contribution in 401K from 6% to 20% and also open a new IRA account..
I might have to file for bankruptcy in April'10 or later.. I am wondering if increasing the contribution to 401K or opening a new IRA will be exempt to bankruptcy or not?
I am in WA state and I will likely use federal exemption if I do end up filing bankruptcy..
The bankruptcy will likely be Chpater 13 becoz my income is more then the median income but it could be Chapter 7..
but I will only know in March if I will file for bankruptcy or not.. I am expecting a payment from a person who promised that in Feb. IF he gives me that payment, I will not file for bankrupcty otherwise bankruptcy is 100%.
the amount of unsecured debt I will have is about 50K for the bankrptcy..

Question: If I open a new IRA (in addition to current 401K) or If i increase my 401K contribtion, will it be safe for bankruptcy in 7 months from now or so..

Ofcourse, if I get my payment, then this doesnt matter.. This is more of what if question...

[chrisdfw]

I don't know about it for the purposes of the means test, but I was below median with very low income.

I made a maximum Roth IRA contribution less than a week before filing.
($5000)

The trustee asked about it and seemed to be unhappy, but did nothing.
The trustee objected to other exemptions, but there was nothing done about the contribution other than a rather unhappy look. (I had been putting the max in the IRAs each year and had not in the year of the bk at the time)

The exemption and the means test are two different issues.