Usually debtors will ask whether retirement accounts are protected in New York bankruptcy, but they might also want to know if contributions to those accounts are protected. As far as the accounts are concerned, the answer is yes. As discussed here, the federal bankruptcy exemptions allow debtors to shield more than $1.2 million in retirement assets, but the state exemptions cover all of them, making them a compelling choice for wealthy debtors.
But what about contributions? The answer is more complicated because they play different roles in chapter 7 and chapter 13. In chapter 7, the question is whether a debtor’s contributions should be included when the debtor is taking the means test. In chapter 13, the issue becomes whether the deductions from a debtor’s wages should be lessened so they can go to the plan instead.
If a debtor’s income is below the state’s median family income, then the issue of contributions to a 401(k) plan is moot. It’s only when the debtor’s income is above the median—and the debtor is taking the means test—that the contributions become an issue. In Form B22A-2, which governs the means test calculation, line 17 discusses “involuntary deductions” from the debtor’s paycheck. These costs include union dues, uniform costs, and mandatory retirement contributions. Voluntary contributions are not explicitly included, but it might be possible to argue that a small contribution is reasonable enough to prove that the chapter 7 filing is not abusive.
For chapter 13 debtors, the stakes are higher. Over the course of a 36-to-60-month repayment plan, debtors’ non-mandatory contributions to their retirement accounts can constitute a significant stock of money that creditors might want. However, in New York there is no bright line rule on how to treat them. Rather, the U.S. Court of Appeals for the Second Circuit has held that the decision of determining whether a voluntary contribution to a retirement account is reasonably necessary should go to the bankruptcy court, in its discretion. (The case can be found here.) The bankruptcy court can consider a number of factors, including the debtor’s age and years until retirement.
Consequently, debtors who regularly contribute to their retirement accounts might be forced out of chapter 7 into chapter 13, but if so, they might be able to convince the bankruptcy court that the contributions are reasonably and should not be rerouted to the repayment plan, depending on the circumstances. Debtors in such situations can strongly benefit from consulting with an experienced New York bankruptcy lawyer who can develop arguments for maintaining regular contributions.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney near me Bruce Weiner for a free initial consultation.