Michigan Bankruptcy Blog

Foster Swift Represents Prevailing Party: Chapter 13 Debtors May Not Exclude Voluntary Post-Petition Retirement Contributions From Disposable Income

In a recent Opinion, Judge Opperman from the Eastern District of Michigan Bankruptcy Court held that a Chapter 13 debtor cannot exclude voluntary post-petition retirement contributions from disposable income.  This Opinion is significant for debtors, trustees, and creditors as it systematically changes the way the Eastern District of Michigan will treat post-petition voluntary retirement contributions in a Chapter 13.

The issue before the Eastern District was whether a Chapter 13 debtor may exclude voluntary post-petition retirement contributions from disposable income. Previously, the Eastern District applied a "reasonableness" test, and permitted chapter 13 debtors to make voluntary retirement contributions provided the contributions were "reasonable" based upon several factors. Relying upon the Sixth Circuit decision In re Seafort,¹ the Eastern District held that Chapter 13 debtors may not exclude voluntary post-petition retirement contributions in any amount.

In Rogers, the Court recognized that the Sixth Circuit's discussion in Seafort was dicta; however, it noted that the Sixth Circuit made it very clear how it would rule on this issue.  The issue in Seafort was whether the income that becomes available after a debtor fully repays a 401(k) loan during the life of a Chapter 13 plan becomes projected disposable income. The Sixth Circuit discussed the competing views regarding voluntary retirement contributions.  Relying on the Prigge² view, the Sixth Circuit held that the income made available once a debtor’s 401(k) loan is fully repaid may not be used to make voluntary retirement contributions, but rather, those funds must be used to fund the debtor’s Chapter 13 Plan.

The Eastern District noted that the Sixth Circuit specifically discussed the differences of the treatment of 401(k) contributions and 401(k) loan repayments.  The Eastern District stated, as did the Sixth Circuit, that if Congress intended to treat voluntary 401(k) contributions like it did 401(k) loan repayments, it would have included a similar section as § 1322(f) which specifically excludes 401(k) loan repayments from disposable income.  Furthermore, both courts noted that Congress did not consider voluntary retirement contributions as “reasonable and necessary expenses” deductible from disposable income as they are not listed in § 707(b)(2)(A) and (B).  Contrarily, Congress expressly excluded 401(k) loan contributions from the list of “necessary expenses” in Official Form 22C, which provides the formula for calculating “reasonable and necessary expenses.”

The Court in Rogers then discussed the relevance of the language included in § 541(b)(7) by citing Seafort.  Section 541(b)(7) provides that certain voluntary retirement contributions “shall not constitute disposable income as defined in § 1325(b)(2).”  Agreeing with the Sixth Circuit, the Eastern District noted that the use of the phrase “except that such amount” before the phrase “shall not constitute disposable income” specifically notes that the amount that would be excluded from disposable income is the amount that had been contributed before the petition date.

The Eastern District stated that although the Sixth Circuit made it clear that its holding in Seafort would not be binding with regard to the issue presently before the Eastern District, it gave very clear direction and guidance on how it would hold on the issue.  Not seeing any reason to deviate from the Sixth Circuit's direction, the Eastern District held Chapter 13 debtors cannot exclude their voluntary post-petition retirement contributions in any amount from their disposable income.

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¹ 669 F.3d 662 (6th Cir. 2012)

² 441 B.R. 667 (Bankr. D. Mont. 2010).

Categories: Chapter 13, Eastern District of Michigan