Contributions to 401(k) retirement plans during a Chapter 13 are not forbidden, as claimed by a colleague.
He paints with far too broad a brush.
A better reading of the Parks decision by the 9th Circuit Bankruptcy Appellate Panel is narrower:
The debtor cannot deduct from their income their on going contributions to a 401(k) retirement plan for purposes of the infamous bankruptcy means test.
Retirement saving in 13
The Bankruptcy Code section that describes contributions to 401(k) plan as being outside of the bankruptcy estate can’t be used to support the deduction of those on going contributions from income when calculating the means test .
And the means test drives what the debtor must pay to unsecured creditors, according to this new decision.
Congress didn’t explicitly OK continuing to provide for retirement in Chapter 13, so it must be forbidden, as a means test deduction, reasoned the judges.
Nowhere does it prohibit the debtor from saving.
It just makes it harder to do, by warping the means test formula so that the claims of credit card issuers and holders of deficiency judgments come first in the debtor’s budget.
Do we believe in saving or not?
The bankruptcy system continues to reap the consequences of poorly written amendments to the bankruptcy law in 2005.
The story goes that the new law was written by a lobbyist on the back of a cocktail napkin. It certainly was rushed through Congress virtually without consideration. Banks, car lenders, and those who were sure someone else was unfairly benefiting by the then existing bankruptcy laws cheered.
At the same time that BAPCPA, the 2005 bankruptcy “reform”, created a universal exemption for a million dollars in IRA savings and protected repayment of 401(k) loans, it left unspecified its intentions about the debtor making continuing provision for retirement.
Which is it to be, folks?
The Parks decision exemplifies our ambivalence about retirement saving. On the one hand, we are exhorted to make provision for retirement and reminded that Social Security was never intended to be a full blown retirement program.
Rather, it is a safety net that provides for some of what’s necessary to retire comfortably.
On the other hand, we see the court decisions that put the interests of the creditor body ahead of retirement.
Consumers are expected to save for retirement only what’s left after their creditors are provided for. And if bad luck or bad judgment leaves them with more debts than they can pay, retirement savings come last in the allocation of funds.
Onward to old age
We need a clearer focus on the big picture: retirement saving is just as much a reasonable and necessary budget item as food, housing and medical care in a bankruptcy budget. Old age will come for us all, and longer life spans suggest we need to be saving more, not less.
To match this view, we need a new Congress as well, to write a clear bankruptcy law that enables all individuals to make adequate provisions for their retirement.
That requires a Congresss not bought and paid for by commercial interests who see only the short term advantage of putting the claims of creditors ahead of, rather than along side, the individual’s need to provide for retirement.
Image courtesy of FantasyClay