Retirement savings in Chapter 13 bankruptcy plans
One of the duties of bankruptcy judges in Michigan and around the country is evaluating the repayment plans submitted by Chapter 13 petitioners. Individuals or couples who file Chapter 13 bankruptcies are expected to use most of what they earn to pay down their outstanding debts over a period of three to five years, and judges may reject proposals that devote large amounts of their disposable income elsewhere. Exceptions may be made to allow debtors to continue to fund their retirement accounts, but this does not mean that they will be able to save as much as they once did.
The amount that can be allocated toward retirement accounts was put to the test in a case involving a Louisiana couple who filed a Chapter 13 petition in March 2016. The payment plan they submitted allocated 18 percent of their income to a 401(k) retirement account, and neither the bankruptcy trustee involved nor the couple’s creditors objected to it. However, a bankruptcy judge did have problems with the plan, and he refused to confirm it on March 14.
In making his ruling, the bankruptcy judge conceded that it was prudent to allow Chapter 13 filers to save for their retirements. However, he said that only about 3 percent of a petitioner’s income should be set aside for this purpose. This figure, according to the judge, allows debtors to prepare for retirement while still meeting their financial obligations.
Individuals or couples are sometimes reluctant to pursue debt relief because of myths, misconceptions or fears. Attorneys with experience in this area could help those struggling with overwhelming debt to overcome these reservations by describing what the effects of a bankruptcy filing will be in the long term.