A Bankruptcy Panel of the U.S. Court of Appeals from the Sixth Circuit (the "Panel") recently held in Burden v. Seafort that debtors in Chapter 13 bankruptcy proceedings could not use income that becomes available after the debtors repaid their 401(k) loans to make contributions to their 401(k) plans.
In this case, the debtors filed for bankruptcy relief under Chapter 13 of the Bankruptcy Code. At the time the debtors filed their petitions for relief, the debtors were not making 401(k) contributions to their employers' 401(k) plans, but were repaying loans from their plan accounts. Each debtor submitted a Chapter 13 plan which provided for a five-year commitment period. Under each debtor's Chapter 13 plan, the 401(k) loans would be repaid in full prior to the end of the five-year period. The Chapter 13 plans proposed that after each debtor repaid the 401(k) loan, the debtor would continue the same payroll deductions used to repay the loan to begin 401(k) contributions to their accounts. The bankruptcy trustee objected to the confirmation of both Chapter 13 plans and asserted that because the debtors were not making 401(k) contributions when their bankruptcy cases began, the debtors must instead use the money for payments to unsecured creditors.
In determining whether a debtor who was not making 401(k) contributions when the case was filed may later begin making such contributions after repaying a 401(k) loan, the Panel stated that Chapter 13 debtors may exclude from property of the estate and disposable income only 401(k) contributions that they are making as of the commencement of their case. The Panel reasoned that property of the bankruptcy estate and exclusions from such estate must be determined as of the filing date of the case. Based on this premise, the Panel explained that only 401(k) contribution elections in effect prior to filing may be excluded from the bankruptcy estate.
The Panel also ruled that the debtors' proposed plans did not comply with the projected disposable income requirements. Under the Bankruptcy Code, projected disposable income a debtor receives during the commitment period must be applied toward payments to unsecured creditors. The Panel declared that because the repayment of a 401(k) loan during the life of each debtor's plan may reasonably be anticipated at the time of the trustee's confirmation of the plan, the income that becomes available after the 401(k) loans are repaid must be considered projected disposable income and be made available to repay unsecured creditors.
Accompanied by a dissenting opinion from one member, the Panel ruled that the debtors may not use income that becomes available after repayment of a 401(k) loan to make contributions to the 401(k) plan. Instead, that money must be used to repay unsecured creditors.