by: Baran Bulkat, Attorney
If you want to file for Chapter 7 bankruptcy, first you must pass the bankruptcy means test. While you are allowed to use some of your expenses on the means test to help you qualify for Chapter 7, voluntary retirement contributions are not one of them (although you may be able to deduct them on the means test in Chapter 13 bankruptcy). In general, you can only deduct mandatory retirement contributions that are required by your employer on the Chapter 7 bankruptcy means test. Read on to learn more about when you can deduct your retirement contributions on the bankruptcy means test.
If your income is greater than the median income of a similar size household in your state, you will have to complete the entire means test form and use your expenses to determine whether you pass. But your voluntary retirement contributions are not expenses you can deduct on the means test to help you qualify for Chapter 7 bankruptcy.
Some employers (usually public and governmental entities) require their employees to contribute a certain portion of their income into a retirement account. If your employer requires you to make retirement contributions as a condition of your employment, you can deduct your contributions on the Chapter 7 bankruptcy means test.
If you took out a loan from your 401(k) or other qualified retirement plan, you may be making monthly payments to pay back that debt. Unfortunately, retirement loan payments are not considered mandatory contributions in Chapter 7 bankruptcy. This means that you can't deduct your retirement loan payments on the Chapter 7 means test. However, you can deduct them in Chapter 13 bankruptcy (discussed below).
If you file for Chapter 13 bankruptcy, you must complete a means test just like in Chapter 7. But the Chapter 13 means test is different than its Chapter 7 counterpart -- it's designed to calculate how much money you should pay your unsecured creditors through your repayment plan.
On the Chapter 13 bankruptcy means test, you are allowed to deduct certain qualified voluntary retirement contributions. Whether a bankruptcy court will allow you to deduct the full amount of your contribution typically depends on whether it is a reasonably necessary expense. To determine if a retirement contribution is reasonable, courts consider numerous factors including the amount of the contribution and how close to retirement a debtor is.
However, the 9th Circuit Bankruptcy Appellate Panel recently held that you can't deduct any voluntary retirement contributions to reduce your disposable income in Chapter 13 bankruptcy. This means that in certain jurisdictions, voluntary retirement contributions will not help you reduce the amount you pay back unsecured creditors. If you are not sure about how your bankruptcy court treats retirement contributions, talk to a knowledgeable attorney in your area to learn more.
For more information on how Chapter 13 plans work, see our topic area on The Chapter 13 Repayment Plan.
In general, you can deduct your retirement account loan payments on the means test in Chapter 13 bankruptcy. But the court will typically require you to increase your monthly plan payment amount when the retirement loan is paid off.