Sixth Circuit Affords Protection to Post-Petition 401(k) Contributions in Chapter 13 Bankruptcies

Mark W. Sandretto and Jared J. Lefevre

gavel on desk with books in background   In a case of (arguably) first impression among the federal circuit courts, the U.S. Court of Appeals for the Sixth Circuit ruled in Davis v. Helbling that Chapter 13 debtors may, in effect, protect from creditors certain post-petition voluntary 401(k) contributions withheld from their wages. 

   In Chapter 13 cases, debtors are required to commit their “projected disposable income” to repayment of unsecured creditors for a period of three to five years.  The bankruptcy court generally cannot confirm a debtor’s Chapter 13 plan absent such a commitment.  A debtor’s “projected disposable income” is reduced by, among other things, amounts necessary to maintain and support the debtor’s and his or her dependents’ existence.  A reduction in the debtor’s projected disposable income necessarily means less money paid to creditors over the plan period.

   Prior to 2005, the majority of courts concluded that wages voluntarily withheld and contributed to a 401(k) plan were nonetheless included as part of the debtor’s disposable income.  In effect, although the debtor was not receiving the funds, the debtor was nonetheless required to commit income to the Chapter 13 plan as though the withholding had not occurred.  In 2005, however, Congress passed the Bankruptcy Abuse and Consumer Protection Act (BAPCPA), which appeared to provide that voluntary employer withholdings from wages contributed to a 401(k) plan do not constitute disposable income within the meaning of 11 United States Code 1325(b)(2).  Owing to both the revised statutory provision’s placement in the overall context of the Bankruptcy Code and the imprecision of the statutory language, bankruptcy courts have interpreted the provision markedly differently, with some courts concluding that post-petition 401(k) contributions voluntarily withheld by an employer are not part of disposable income while others concluded the provision constituted an exclusion from disposable income only for accumulated pre-petition 401(k) contributions and balances, but not ongoing post-petition contributions.

   In Davis, the debtor’s employer had long been withholding approximately $220 per month from her wages in voluntary 401(k) contributions.   The debtor sought to continue such contributions and utilize them to reduce her projected disposable income for purposes of calculating the amount payable to unsecured creditors under her Chapter 13 plan.  The Chapter 13 trustee objected.  While the bankruptcy court ruled in favor of the trustee, it acknowledged the unsettled nature of the law on this subject.  Relying upon canons of statutory interpretation, the Sixth Circuit reversed the bankruptcy court’s decision.  The majority opinion concluded the most logical reading of the admittedly imprecise statutory text favored an interpretation excluding voluntary 401(k) contributions withheld by an employer from projected disposable income regardless of whether the withholdings occurred pre- or post-petition so long as the Chapter 13 plan comported with the remainder of 11 USC 1325, including that the plan be proposed in good faith. The dissent concluded the majority opinion misinterpreted the statutory provision in light of established pre-BAPCPA judicial precedent and upset the balance struck by Congress in enacting BAPCPA between protecting debtors and curbing perceived abuses of the bankruptcy system.     

   Despite the dissent’s reservations, the law is now settled in the Sixth Circuit that debtors may generally exclude 401(k) contributions voluntarily withheld from wages by their employers from the definition of projected disposable income for purposes of their Chapter 13 plans so long as the plan comports with the remainder of 11 USC 1325.  

   Should you have any questions regarding how this decision may affect you, please contact either Mr. Sandretto or Mr. Lefevre.


   Disclaimer: This alert has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.