Can you keep making 401(k) contributions during Wilmington bankruptcy?
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When you file Wilmington Chapter 13 bankruptcy, all your disposable income is expected to go towards paying back your creditors. This type of bankruptcy sets you up on a repayment plan that lasts from three to five years. Under the plan, you won’t pay back all of your debt. Some will be discharged at a lower percentage, but some debts must be paid back in full.
Unsecured debts that may be discharged at less than face value include credit cards, medical bills, uncollateralized personal loans, qualified older income taxes, and old utility balances, etc. Some debts must be paid back in full like mortgage and vehicle loan arrears (if you keep the property), child support, alimony, and the like.
How much you’ll pay each month is a calculation base on your income, living expenses, secured debt obligations, and debt in arrears. All of your disposable income must be committed to the repayment plan, but what exactly is disposable income and how do 401(k) contributions factor into it?
What is disposable income?
Most people’s assumption of disposable income differs widely from the bankruptcy definition. Some financial sites define it as money you can spend or save after you pay income taxes. When it comes to Wilmington bankruptcy, disposable income (DI) is a complex calculation. Here’s a glimpse at how your bankruptcy attorney will calculate DI while setting up your repayment plan.
Monthly Income (average gross income from all sources for the last six months divided by 6)
- Necessary expenses (rent, utilities, child care, medical/dental expenses, clothing, food, etc.)
- Installment payments (monthly car loan and mortgage payments)
- Priority debts (child support, alimony, etc.)
- Income taxes, payroll taxes, and mandatory deductions (healthcare premiums, 401(k), etc.)
- Other expenses allowed under the law
= Disposable Income
The calculation varies based on whether you earn more or less than North Carolina’s median income and some expenses may be tabulated at actual cost while others may not exceed state or federal guidelines. You can see that calculating disposable income is convoluted. That bottom line number determines how much you’ll pay each month for your Chapter 13 plan.
401(k) contributions affect disposable income
In the list above was income and payroll taxes and mandatory deductions. These are line items on your paycheck and one of them may be 401(k) plan contributions. Therefore, the amount you contribute to your retirement fund lessens your disposable income. In some cases, you might be allowed to keep pushing money into your 401(k) even during Chapter 13 bankruptcy.
Continuing to make the contributions during your Wilmington bankruptcy means you have less money each month to devote to your repayment plan. This means saving for your retirement is short-changing your unsecured creditors, but it may be allowed in your plan and if so, might be better for you in the long-run.
Can you continue 401 (k) contributions during Chapter 13?
If you’re planning to file Chapter 13, don’t change your 401(k) contributions before you speak to an experienced local bankruptcy lawyer. You might be able to continue while repaying your debt and if so, this might be beneficial. Your attorney can look at your debt, finances, and income and let you know whether you’ll be allowed to continue the payments, subject to the Trustee’s approval.
Some courts will fight you on continuing your 401(k), and others will allow it so long as it’s reasonable. If you borrowed against your 401(k) and are paying back the loan via payroll deduction, this is not a “voluntary” contribution and will be allowed. What’s up for debate is a voluntary contribution to your 401(k).
Recent court ruling on 401(k) during bankruptcy
A recent case ruled in favor of the debtor to continue plan contributions while in Chapter 13 despite an objection filed by the bankruptcy Trustee assigned to her case. The court ruled the payments could continue because they were long-standing, and the repayment plan was submitted in good faith.
If you’re already devoting money each payroll to your 401(k), don’t change anything until you talk to a bankruptcy lawyer. If you stop the contributions, you lose the continuity argument that won the case mentioned above and linked below. Don’t change anything until you talk to a lawyer or you might complicate your case and lose some possible benefits.
If you’re struggling to pay your debts and are in arrears on your mortgage or auto loan, Chapter 13 bankruptcy might be the best solution. To find out more, contact the Law Offices of John T. Orcutt. Read client reviews and then call +1-919-646-2654 now for a free Wilmington bankruptcy consultation at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.