People in Virginia who are considering a bankruptcy will likely need to limit how much they set aside to fund retirement plans during the course of the bankruptcy. A judge in one bankruptcy court rejected a Chapter 13 payment proposal from a married couple because about 18 percent of the couple’s income would be directed to a retirement account.
Although the payment was intended to repay a loan taken from the husband’s 401(k) plan, the judge reviewing the plan decided that the amount was too high and the couple had not provided sufficient information to convince the judge that the proposal represented a good faith attempt to repay creditors. Under a Chapter 13 plan, a debtor creates a payment plan based upon future income that addresses debts over three to five years.
The judge acknowledged that a debtor could set aside income toward retirement, but a reasonable amount would be about 3 percent of income. The facts of individual cases might allow a court to approve a higher amount, but a bankruptcy plan should strike a balance between paying debts and saving for retirement.
When pursuing bankruptcy protection, a person can expect the court to scrutinize income and debts. The advice of an attorney prior to filing Chapter 13 bankruptcy could inform the person about what to expect. An attorney could explain how the legal action might allow the person to keep a home or other assets while sending payments to creditors. The person could ask the attorney to organize financial records and prepare other court filings. During the bankruptcy, the attorney could also take over communications with creditors and insulate the person from hostile conversations.