Category Archives: Bankruptcy and 401k

Bankruptcy and 401k Plans and 401k Loans


Are contributions to a 401k plan okay in a Chapter 13 bankruptcy case?  Or should contributions to a 401k be suspended during the Chapter 13 plan and that money be submitted to the control of the chapter 13 trustee for the benefit of creditors?  When the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed and became effective on October 17, 2005, interpretation of the changes to the Bankruptcy Code continues.  A recent 9th Circuit Bankruptcy Appellate Panel case weighed in on this issue in, In re Parks, No. 11-1366 (9th Cir. BAP, Aug. 6, 2012).  To muddy the waters a little more, Bankruptcy Appellate Panel decisions are not binding on district courts.

The Ninth Circuit Bankruptcy Appellate Panel held that voluntary contributions to a 401k should not continue during a Chapter 13 plan.  The BAP ruled that the Bankruptcy Code protects the funds already contributed to the 401k plan, but there is no language that allows the contributions to continue and reduce the bankruptcy filer’s disposable income or income available to creditors.  Many trustees have used a reasonableness approach to this issue.  If a debtor was contributing the maximum amount to a 401k plan each paycheck, depending upon the circumstances, the trustee would object to confirmation on the basis that they are contributing too much to the 401k plan.  We will see if and how chapter 13 trustees interpret this new case going forward.  Bankruptcy lawyers should probably advise their clients about this issue though and the possible consequences.

But what about repaying a 401k loan?  Well, that is different.  Section 1322(f) generally says the terms of a 401k loan cannot be altered.  So a 401k loan automatically deducted from a bankruptcy filer’s paycheck can reduce their disposable income while contributions to the 401k plan should not be continued once the case is filed.  Another case that involved a Chapter 7 case, In re Egebjerg), 574 F.3d 1045 (9th Cir. 2009), held that the 401k loan is not a debt under the Bankruptcy Code and should not be listed in Schedule D.

But wait a second, what about people that work for the state, county or city governments?  Their contributions to CALPERS, STERS, SFERS and other government pension systems are mandatory and are automatically deducted from their paychecks each month.  These mandatory deductions for retirement for government employees would seemingly be allowed to continue.  The new ruling from the Ninth Circuit Bankruptcy Appellate Panel could create unequal results for those choosing to file for protection under Chapter 13 of the Bankruptcy Code.  A nongovernment employee would potentially have to pay more to their creditors since they cannot continue to deduct retirement contributions while the government employee with a mandatory deduction would pay less.  This could be true even if both had the same exact income and expenses.  Ultimately the bankruptcy court is a court of equity.  The goal is to treat all parties fairly under the Bankruptcy Code.  Bankruptcy lawyers should look at this issue carefully when discussing filing a chapter 13 bankruptcy case.  The issue of contributions to retirement accounts is not over and there should be more clarification to come.