Deductions allowed for 401k contributions

[Boscoe]

What is the generally allowed percentage of gross income for 401k contributions in a ch 13 plan? The code does not state any maximum, which I think sounds strange.......What experiences are out there? 5%? 10%

[CATCHMEIFYOUCAN]

i originally had 6% and the trustee never mentioned anything about it, i believe (depending on the State) you are filing 401k is exempt.

good luck, catchmeifyoucan

[Boscoe]

Yes, I know the 401k's are exempt. But it allows you to include as deductions to determine disposable income what you contribute to your 401k, but no max % is given. Sure would be a way to keep the $ in your own pocket!

[anonymuse]

401Ks are an exempt asset. Your contributions to a 401K plan during a Ch 13 generally is at the discretion of your individual trustee.

[aa06a47]

What is the generally allowed percentage of gross income for 401k contributions in a ch 13 plan? The code does not state any maximum, which I think sounds strange.......What experiences are out there? 5%? 10%

It varies from court to court / trustee to trustee. Some feel that creditors should be paid before contributions to 401k's. My trustee feels 3% is the correct amount. I also think many look at the total situation. For example, if your not spending too much on a vehical, the trustee may allow you to put a little in your 401k.

[lrprn]

Our trustee allows 5% of gross income to be contributed to a 401K during Ch 13 bankruptcy. If it's a joint filing, then it's 5% each.

Like aa said, the level of contribution allowed varies widely from trustee to trustee and bk district to bk district. Really does depend on which straw you pull when you file.

[HHM]

The answer will depend on the local custom and the way the state exemptions are worded...if its a large amount, i.e. a couple hundred dollars per month being contributed, the trustee will quash it...if its less than $100 per month, the trustee may not care. Unless your state statutes say otherwise, under the letter of the law, 401K deductions would not be exempt because they are not necessary for living. But from what I have been hearing, most people seem to be allowed to continue 401k deductions.

[$$only4ever]

Our contributions when we filed Chapter 13 were: my pay 7% and DH pay 8%
The trustee never said a word about the percentages. I thought that it might have been our ages, I was 53 and DH was 58. Also, I heard that the judge who is over our case is extremely sympathic to filers over 50. Whew, dodged that bullet,\.

[lrprn]

Our contributions when we filed Chapter 13 were: my pay 7% and DH pay 8%
The trustee never said a word about the percentages. I thought that it might have been our ages, I was 53 and DH was 58. Also, I heard that the judge who is over our case is extremely sympathic to filers over 50. Whew, dodged that bullet,\.

Really glad that you were both able to continue to contribute to your 401Ks at your current levels! My husband and I are both older than you two are (we're 55 and 61 and paying 5% each - we reduced to 5% on our lawyer's advice since he knew our trustee would only allow 5% each) - however, our trustee actually filed an objection to our case based on our 401K contributions. He's lumping repaying my husband's ill-advised 401K withdrawal 'loans' with both our contributions which puts us over the allowed 5% each. Despite a pre-trial conference with the district bk judge, the trustee and our lawyer can't agree on a compromise.

Since we're the perfect test case for this plus our mismatched Schedules I and J totals which is causing a disagreement about what our monthly payments should be (the other trustee objection to our case), we are headed to court for an official ruling by the judge in a few months....sigh. Are we nervous as cats in a room full of rocking chairs? You betcha! :/

[HHM]

You didn't mention 401K loans...those are death. There is not a Trustee in the land that will allow 401K loan repayments, and most judges will agree with the Trustee on that one. (Strictly speaking a 401K is not a loan under the Bankruptcy Code definitions, you are essentially borrowing your own money, even though everyone knows there are serious penalties for not paying it back).

Odds are, you will need to come up with something in your budget to cover those 401K loan repayments because the Trustee will win that one 9 times out of 10.

[aa06a47]

You didn't mention 401K loans...those are death. There is not a Trustee in the land that will allow 401K loan repayments, and most judges will agree with the Trustee on that one. (Strictly speaking a 401K is not a loan under the Bankruptcy Code definitions, you are essentially borrowing your own money, even though everyone knows there are serious penalties for not paying it back).

Odds are, you will need to come up with something in your budget to cover those 401K loan repayments because the Trustee will win that one 9 times out of 10.

HHM, The new law made 401k loan paybacks an allowable expense. It is in the bk code. Your correct under the old law. This is one of the few things the new bk code actually helped people with 401k loans with.

On the other hand, 401k contributions while in a chapter 13 are not covered by the code. It relies on the generosity of the trustee and judge on if they feel someone should be allowed to save money while in the 13.

In lrprn case, the local trustee allows 5% into a 401k, but is saying that is too much since your already putting in a large amount for repayment of a loan. I wouldn't really want to be a test case on this one since there is no legal basis for the court allowing the 5% to start with. Just pray lrprn wins!!!

[treehugger1]

aa is correct. The new BK chapter 13 specifically allows for 401 (k), 403 (b), and essentially any loan repayments on deferred compensation plans. Otherwise, one would "acquire" a potential "debt" with the IRS. The attorneys I spoke with said my loan payments would be paid outside of the plan.

[lrprn]

HHM, The new law made 401k loan paybacks an allowable expense. It is in the bk code. Your correct under the old law. This is one of the few things the new bk code actually helped people with 401k loans with.

On the other hand, 401k contributions while in a chapter 13 are not covered by the code. It relies on the generosity of the trustee and judge on if they feel someone should be allowed to save money while in the 13.

In lrprn case, the local trustee allows 5% into a 401k, but is saying that is too much since your already putting in a large amount for repayment of a loan. I wouldn't really want to be a test case on this one since there is no legal basis for the court allowing the 5% to start with. Just pray lrprn wins!!!

And if we don't win in court, our options are (1) to continue paying my husband's ill-advised retirement loans and reduce our contributions into our 401Ks so that the whole package gets under 10% total, or (2) continue contributing at our current 5% levels each and let the tax hit come around next April for the unpaid l401K withdrawal 'loans'. The hit will be considerable - probably around $2,000 - so then our lawyer files a modification to our plan to pay that off. Either way the trustee doesn't get any extra money from us - it's just that our district would like to get this issue settled for the future by forcing our judge to make an official ruling. Will keep everyone posted on how this goes.

[lrprn]

aa is correct. The new BK chapter 13 specifically allows for 401 (k), 403 (b), and essentially any loan repayments on deferred compensation plans. Otherwise, one would "acquire" a potential "debt" with the IRS. The attorneys I spoke with said my loan payments would be paid outside of the plan.

Currently we are paying back my husband's six 401K "loans" outside our plan as well. However, with our plan not confirmed yet due to the trustee's objection, who knows what will happen in the future....time will tell...

[aa06a47]

And if we don't win in court, our options are (1) to continue paying my husband's ill-advised retirement loans and reduce our contributions into our 401Ks so that the whole package gets under 10% total, or (2) continue contributing at our current 5% levels each and let the tax hit come around next April for the unpaid l401K withdrawal 'loans'. The hit will be considerable - probably around $2,000 - so then our lawyer files a modification to our plan to pay that off. Either way the trustee doesn't get any extra money from us - it's just that our district would like to get this issue settled for the future by forcing our judge to make an official ruling. Will keep everyone posted on how this goes.

I would do (1) if I were you. If you chose to not pay your 401k loan back, then that monthly payment amount becomes "disposible income" for the trustee. Your much better off paying the 401k loans and if necessary suspend contributions. As you pay off the 401k loans, I would up the contributions to the 401k to the levels the trustee allows.

The worst you can do in court is for the judge to tell you that you cannot contribute new money to a 401k. He cannot rule against your paying back the 401k loan.