Texas residents who make contributions to a 401(k) plan can generally claim those deductions as expenses when filing for Chapter 13 bankruptcy. A trustee in one case claimed that a debtor needs to make contributions in the six months proceeding bankruptcy for them to count as a valid expense when calculating disposable income. However, an Illinois bankruptcy judge disagreed saying that the debtors in question were not doing so as an act of bad faith.
The case in question involved a couple that wanted to make a $200 monthly contribution to the husband's 401(k). That would have come out of the couple's disposable income, which would have resulted in less money going to creditors each month. As part of a Chapter 13 bankruptcy, payments must be made over a three- or five-year period using regular income. Although the court noted that the deduction may have left creditors with less money to collect each month, that alone was not enough to show bad faith.
In the ruling, the court noted that there were no other allegations that the couple was acting in bad faith. Furthermore, the deductions were likely to be permissible and within legal limits. The deduction would also be consistent with protecting the ability for people to save for retirement.
Filing for Chapter 13 bankruptcy may make it easier to obtain lower monthly debt payments. It may also make it possible to retain property and put an end to creditor collection efforts. An attorney can often work with a client to prepare a repayment plan and then submit it to the court for its approval.