Voluntary 401k Contributions Not Excluded from Disposable Income

Posted by NCBRC - November 5, 2019

A chapter 13 debtor’s voluntary post-petition contributions to his 401k plan must be included in the calculation of disposable income under section 1325. Penfound v. Ruskin, No. 18-13333 (E.D. Mich. Sept. 20, 2019).

Above-median Debtor, John Penfound, worked continuously for twenty-four years during which time he made regular voluntary contributions to his 401k plans. When he and his wife, Jill Penfound, filed a petition for chapter 13 bankruptcy, he sought to continue contributing $1,375/month to his 401k and exclude those amounts from his calculation of disposable income. Upon objection by the trustee, the bankruptcy court ordered the debtors to amend their proposed plan based on a re-calculation of disposable income including the monthly contributions to the 401k plan. The debtors appealed confirmation of the amended plan.

Relying on reasoning and dictum in In re Seafort, 669 F.2d 662 (6th Cir. 2012), the district court affirmed.

In Seafort, the court found that the debtor could not voluntarily recommit funds to his 401k plan after they became available to him post-petition when he paid off his 401k loan, without including those funds as post-petition income in his bankruptcy estate under section 541(a)(1). The Seafort court walked through three approaches courts have taken to the treatment of voluntary contributions to a retirement plan: 1) allowing voluntary contributions with only a good faith limitation, 2) allowing contributions so long as they are a continuation of contributions the debtor was making pre-petition, and 3) not allowing voluntary contributions in any circumstances, as found in In re Prigge, 441 B.R. 667 (Bankr. D. Mont. 2010). The Seafort court adopted the third approach. The court found section 541(b)(7), which provides that property of the estate shall not include wages withheld by an employer as contributions to a qualified employee retirement plan, was limited to pre-petition contributions. In so holding, the court reasoned that the hanging paragraph to section 541(b)(7) which mystifyingly adds, “except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2),” was intended to clarify Congress’s intent that only pre-petition contributions to a 401k plan not be included in the calculation of disposable income.

Even though the facts of Seafort differed from those in the present case, the bankruptcy court, and the district court on appeal, relied heavily on dictum contained in a footnote in which the Seafort court, again relying on Prigge, specifically disagreed with the trustee’s concession that voluntary contributions that a debtor continues to make post-petition are properly excluded from the bankruptcy estate. Finding this dictum to be a clear indication of how the Sixth Circuit would treat the issue, the court here concluded that the bankruptcy court properly declined to permit the debtors to exclude voluntary contributions to their 401k plan from their bankruptcy estate.

The court also rejected the debtors’ argument that the contributions be treated as reasonably necessary expenses in the disposable income calculation. The court found that the bankruptcy court considered Mr. Penfound’s age, 54, the amount of money he had accumulated in his retirement account, $517,075, and his and his wife’s current income, when it concluded that the additional $82,500 that would go to their unsecured creditors was not necessary to maintaining their standard of living. Where the debtors failed to counter these facts, the court found no error in the bankruptcy court’s conclusion.

The court affirmed.

The debtors have appealed the decision to the Sixth Circuit, No. 19-2200.

Penfound ED Mich Sept 2019

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