In my last post, I discussed retirement contributions within the Chapter 7 context. Our attention now turns to retirement contributions in a Chapter 13 bankruptcy.
II. Retirement Contributions In A Chapter 13 Bankruptcy
In discussing Chapter 7, I referred to Form 22A. The Chapter 13 analogue is Form 22C, which is very similar to Form 22A; but there are some differences.
One difference is Form 22C’s line 55, which permits a debtor to list “Qualified retirement deductions.” There is no analogue to Form 22C’s line 55 in Form 22A. This indicates that the Commission that created Form 22 (Form 22A for Chapter 7, Form 22B for Chapter 11, and Form 22C for Chapter 13) believed that Congress wanted Chapter 13 debtors, but not Chapter 7 debtors, to able to contribute to their retirement —presumably to “encourage” debtors to go into Chapter 13, so that their creditors would receive something through the Chapter 13 plan.
Why did the Commission include line 55 in Form 22C? The best explanation is found in 11 U.S.C. § 541(b)(7). A little background will help to understand that statutory subsection and its application to the creation of Form 22C.
A. The Bankruptcy Estate
When a person files for bankruptcy protection under any chapter, a bankruptcy estate is created from all of the debtor’s possessions. 11 U.S.C. § 541(a) describes what goes into the estate. Although that subsection appears to include everything the debtor owns or has an interest in, some of the things the debtor has are excluded from the estate. That is the purpose of 11 U.S.C. § 541(b): It removes certain things from the estate.
In particular, 11 U.S.C. § 541(b)(7) excludes the following things from the bankruptcy estate (with emphasis added):
any amount—
(A) withheld by an employer from the wages of 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;
(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) 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
(ii) to a health insurance plan regulated by State law whether or not subject to such title; or
(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;
(II) a deferred compensation plan under section 457 of the Internal Revenue Code of 1986; or
(III) a tax-deferred annuity under section 403(b) 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
(ii) to a health insurance plan regulated by State law whether or not subject to such title;
In sum, this subsection excludes from the bankruptcy estate contributions made to a qualified retirement plan or health insurance plan. Thus, in a Chapter 7 bankruptcy, a debtor can keep all money contributed to a qualified retirement plan, without any fear that the Chapter 7 Trustee will swoop in like a bird of prey and seize those funds.
B. The Size Of Chapter 13 Plan Payments
But 11 U.S.C. § 541(b)(7) also includes language — the verbiage I highlighted — that applies only in a Chapter 13 case. That language is found in 11 U.S.C. § 1325(b)(2). That subsection states:
For purposes of this subsection, the term “disposable income” means current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) less amounts reasonably necessary to be expended—
(A)
(i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed; and
(ii) for charitable contributions (that meet the definition of “charitable contribution” under section 548(d)(3)) to a qualified religious or charitable entity or organization (as defined in section 548(d)(4)) in an amount not to exceed 15 percent of gross income of the debtor for the year in which the contributions are made; and
(B) if the debtor is engaged in business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business.
In other words, 11 U.S.C. § 1325(b)(2) just gives us Chapter 13’s definition of DMI. In a less than 100% plan (i.e., a plan that over its lifetime pays the general unsecured creditors less than 100% of what they are owed), this is the amount the debtor is supposed to pay each month. (There are other factors that come in play here that are outside of the scope of this post. For details see my February 14, 2013 discussion of DMI).
If you’ve followed the discussion thus far, you would naturally conclude that the portion of 11 U.S.C. § 541(b)(7) highlighted above is the reason the Commission included line 55 in Form 22C. They read that language to exclude ongoing contributions to a 401(k) plan from the calculation of Chapter 13 DMI.
Was the Commission correct in its interpretation of 11 U.S.C. § 541(b)(7)? In my humble reading of the statute, yes. However, the Bankruptcy Appellate Panel (the “BAP”) disagreed.
C. In re Parks: No Walk In The Park For Chapter 13 Debtors
In In re Parks, BAP No. MT-11-1366-JuMkH, Bk. No. 11-60050 (9th Cir. B.A.P. Aug. 6, 2012) — the BAP held that § 541(b)(7) doesn’t mean what it appears to say. Instead, the BAP held (with emphasis added):
[B]y reading § 541(a)(1) and § 541(b)(7)(A) together, the most reasonable interpretation of § 541(b)(7)(A) is that it excludes from property of the estate only those 401(k) contributions made before the petition date.
Thus, according to the BAP, a Chapter 13 debtor cannot contribute to a 401(k) plan while in Chapter 13, unless, of course, the plan is a 100% plan. However, this position is, according to the Court in In re Drapeau, Case No. 11-44747 (Bankr. D. Mass. Jan. 8, 2013), the minority position (emphasis added):
Relying on the seemingly plain statement in § 541(b)(7) that “such amount [voluntary retirement contributions] . . . shall not constitute disposable income,” a majority of courts have interpreted section § 541(b)(7) as unequivocally removing such contributions from the projected disposable income calculation under § 1325(b)(2). But a minority of courts have held otherwise.
In its tenth footnote, the Drapeau Court listed just a few of the plethora of cases putting forward the majority position:
See, e.g., In re Paliev, 2012 WL 3564031 (Bankr. E.D. Va. Aug. 17, 2012); In re Egan, 458 B.R. 836 (Bankr. E.D. Pa. 2011); In re Gibson, 2009 WL 2868445, *2 (Bankr. D. Idaho Aug. 31, 2009); In re Padilla, 2009 WL 2898837, *2 (Bankr. D.P.R. June 23, 2009); In re Seafort, Nos. 08-3380, 08-22417, 2009 WL 1767627, *2 (Bankr. E.D. Ky. June 22, 2009), overruled by Seafort, 669 F.3d 662; In re Mati, 390 B.R. 11, 15 (Bankr. D. Mass. 2008); In re Garrett, 2008 WL 6049236, *1 (Bankr. M.D. Fla. Jan. 18, 2008); In re Shelton, 370 B.R. 861, 866 (Bankr. N.D. Ga. 2007); In re Puetz, 370 B.R. 386, 392 (Bankr. D. Kan. 2007); In re Devilliers, 358 B.R. 849, 864 (Bankr. E.D. La. 2007); In re Njuguna, 357 B.R. 689 (Bankr. D.N.H. 2006); Baxter v. Johnson (In re Johnson), 346 B.R. 256, 263 (Bankr. S.D. Ga. 2006).
D. What Is A Chapter 13 Debtor To Do?
So where do we stand? The BAP says you can’t contribute to your retirement while in Chapter 13, but most other courts disagree.
As I have said before, bankruptcy judges are not necessarily bound by BAP decisions. In In re Silverman, 616 F. 3d 1001, 1005 and fn.1 (9th Cir. 2010) the Ninth Circuit held:
[W]e have never held that all bankruptcy courts in the circuit are bound by the BAP. See, e.g., Bank of Maui v. Estate Analysis, Inc., 904 F.2d 470, 472 (9th Cir. 1990) . . . Nevertheless, we treat the BAP’s decisions as persuasive authority given its special expertise in bankruptcy issues and to promote uniformity of bankruptcy law throughout the Ninth Circuit.
Thus, while BAP decisions may have persuasive value, they do not have stare decisis force in the Ninth Circuit.
I recently attended a continuing legal education program conducted by the sole Chapter 13 Trustee in the Santa Ana Division of the Central District of California. He stated that he would only object to an ongoing retirement contribution if a debtor were contributing more than five percent of his income to a 401(k) plan. Therefore, in Santa Ana a Chapter 13 debtor can contribute five percent without objection — unless the plan payout is de minimis.
Given that the majority of courts read § 541(b)(7) as I do, and that BAP decisions have no precedential value, and that Form 22C still has line 55, I plan to continue entering the amounts my clients have been contributing to their retirement plans. I will, of course, explain the issue to each client beforehand. Then, if we get an objection, I will litigate it. This may have to be done on a judge-by-judge basis until either the Ninth Circuit, or the Supreme Court, considers the question.
Do any of you reading this who are attorneys have a good test case with which you want help on an appeal?
Finally, it just seems like good public policy to permit Chapter 13 debtors to contribute to their retirement, and thus reduce the likelihood that they will eventually become wards of the state.
If you’re facing insurmountable debt and you want to get the fresh start that bankruptcy affords, call a high quality bankruptcy attorney to learn of your options.