401k contributions deductible court finds

Florida residents may be able to deduct contributions to a 401k plan even if they hadn’t contributed in the six months before filing for bankruptcy. That is what a judge in Illinois ruled in Oct. 2017. As long as there was no intent to show bad faith, the retirement contributions can be counted as an expense when calculating disposable income.

When filing for Chapter 13 bankruptcy, a debtor must use disposable income to pay creditors according to a set payment plan. The plan lasts for three or five years using regular income to repay debt balances owed. In this case, a couple wanted to deduct $200 a month to put into their 401k. Although the trustee in the case objected, the trustee also acknowledged that the deduction would be allowed had similar ones been made in the prior six months.

The judge ruled that merely taking an expensive deduction is not in itself bad faith. It was also not outside the norm for a court to allow a 401k deduction to be included as a deductible expense after filing. Furthermore, the ruling acknowledged that there had been no allegations of bad faith toward the debtors. According to the United States government, retirement savings are to be protected and encouraged as a matter of policy.

Filing for Chapter 13 bankruptcy may provide an individual with a way to obtain debt relief. While some debts may need to be repaid in full, paying them off over three or five years could reduce monthly payments. Interest will generally not accrue during the repayment period. Those who have secured loans may be able to either catch up on past due balances or renegotiate the terms of the loan before a repossession or foreclosure takes place.