In recent years, bankruptcy courts around the country have been divided over whether a Chapter 13 bankruptcy filer can continue to make payroll contributions to a retirement plan during the Chapter 13 repayment period. In a recent case, the Bankruptcy Appellate Panel of the 9th Circuit ruled that Chapter 13 debtors cannot continue such voluntary contributions during Chapter 13 bankruptcy. In re Parks, No. 11-1366 (9th Cir. BAP, Aug. 6, 2012).
No Voluntary Retirement Plan Contributions During Chapter 13
The court ruled that when you file for Chapter 13 bankruptcy you cannot make voluntary contributions to a retirement plan (such as a 401(k) plan) through payroll deductions. Instead, you must devote that money to your Chapter 13 plan. (Learn more about the Chapter 13 Repayment Plan.)
Some courts in other areas of the country have allowed Chapter 13 debtors to continue retirement plan contributions, especially if the debtor is near retirement age.
Retirement Account Loan Payments Can Continue in Chapter 13
The 9th Circuit BAP did, however, say that if you are making payments on a retirement account loan(you withdraw money from your retirement account as a loan, and then pay it back over time), those payments may continue during your Chapter 13 repayment period. This confirms with how other bankruptcy courts across the nation treat this issue.
Existing Retirement Funds Are Safe
For the most part, in both Chapter 7 and Chapter 13 bankruptcy, the money that is already in your retirement account when you file for bankruptcy is safe. For details, see Your Retirement Plan in Bankruptcy.
To learn more about Chapter 13 and the repayment plan, visit Nolo’s Chapter 13 Bankruptcy topic.