Posted on September - 26 - 2010
Chapter 13 repayments – Projected disposable income
If a debtor is certain or almost certain to have a change in income during a Chapter 13 repayment plan, creditors are entitled to adjustments in payments. See Hamilton v. Lanning, 560 U.S. ___ (decided June 7, 2010). In a recent ruling by the Sixth Circuit Court of Appeals, Burden v. Seafort (In re Seafort), 09-8062, (6th Cir.), the Court applied the principles set forth in Hamilton in the context of a debtor’s available income after repaying a 401(k) loan.
In In re Seafort, the debtors were not making contributions to their 401(k) plan at the time each filed for bankruptcy under Chapter 13. The debtors were, however, repaying 401(k) loans through payroll deductions which were included in the proposed Chapter 13 plan. Under the proposed plans, the loans were to be repaid before the conclusion of the 5 year plans. Once the loans were repaid, the plans called for the payroll to continue as 401(k) contributions. The Trustee filed objects to both plans on grounds that the debtors were not making 401(k) contributions at the time the petitions were filed and therefore, could not exclude the income from creditors once the loans were repaid from the Chapter 13 repayment plan. The bankruptcy court agreed with the debtors and Ordered the plans approved without modification. On appeal, the Sixth Circuit sided with the Trustee and held that the post-petition income which became available after repayment of the 401(k) loan, had to be committed to the Chapter 13 plan. As a result, the debtors were required to delay making contributions to their 401(k) until conclusion of the Chapter 13 bankruptcy.
Applying the rulings in In re Seafortand Hamilton, future debtors should be advised that if they have access to an approved 401(k) plan, they should make regular contributions to the plan before filing for bankruptcy to preserve their right to contribute to the plan once the bankruptcy petition has been filed. Contributions to approved 401(k) plans do not count as income and can be critical to obtaining that fresh start once the bankruptcy process has been concluded. Given the court’s stance regarding changes in income, debtors should also plan accordingly when preparing their Chapter 13 plan to avoid the hassle of a challenge by a Trustee. If a debtor’s income is certain, or almost certain to change before the conclusion of a Chapter 13 plan, it should be addressed in the plan.
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