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Chapter 13 bankruptcy and 401(k) deductions

Virginia residents who are filing for Chapter 13 bankruptcy can exclude 401(k) deductions when they are calculating their disposable income for their bankruptcy payment plan, even if the contributions were not made during the six months preceding the bankruptcy. This is according to an Oct. 30 ruling by an Illinois bankruptcy court.

In its decision, the court said that it was guided by the decisions made by most of the courts that had to rule on a similar case. It found that unless there was demonstrable bad intent, the bankruptcy filers could include their retirement plan deductions as one of their expenses.

The bankruptcy case involved a married couple who filed for Chapter 13 bankruptcy on May 10, 2017. The couple wanted to take $200 from their disposable income each month and place it into the husband's 401(k) account.

An objection was raised by the Chapter 13 bankruptcy trustee because the contributions had not be made during the six months before the bankruptcy was filed. The trustee asserted that the debtors would have been allowed to make the deduction had they already been making the contributions during that six-month timeframe.

Most of the courts that addressed the issue found that post-petition 401(k) contributions were allowable. However, the contributions would have to be within legal guidelines and made in good faith. It was determined that there were claims of wrongdoing against the debtors. The court also ruled that deducting the expense and causing less money to be applied to unsecured debt is not proof of an act of bad faith.

A bankruptcy attorney may advise clients who are in debt about how a Chapter 13 bankruptcy can give them a fresh financial start. The attorney may advise which debts can be reorganized into an affordable payment plan.

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