You may be considering Chapter 13 because your debt has become unmanageable, but that doesn’t mean you should stop thinking about retirement.
Maybe you have contributed to a 401(k) for years. Perhaps your employer matches part of what you put in, and stopping feels like giving up money you will need later. You might also be repaying a loan you took from the account.
Chapter 13 does give certain retirement contributions special treatment. The answer still isn’t as simple as saying you can continue every contribution exactly as before.
Your contribution history, the type of retirement plan you have, and any retirement loans can all affect the numbers in your case. Get help from the bankruptcy attorneys at Kain + Henehan for help with your case.
How Retirement Contributions Affect Your Chapter 13 Budget
Chapter 13 looks closely at where your money goes each month. You will report your income and household expenses, and the plan will determine how much you need to pay toward your debts. Certain contributions to qualified retirement plans are treated differently from ordinary spending.
That can allow some people to keep contributing to retirement while in Chapter 13. If you have contributed 5 percent of every paycheck for years, that is different from increasing your contribution from $50 to $700 shortly before filing. A trustee may question a sudden change that leaves much less money available for creditors.
Bring several months of pay stubs to your attorney. They can show what you were actually doing before bankruptcy entered the picture.
Which Retirement Contributions May Be Allowed During Chapter 13
Many employer-sponsored retirement plans may be protected under bankruptcy rules. For example, you may have a 401(k) contribution automatically deducted every payday. Filing Chapter 13 does not necessarily mean that deduction has to disappear.
Still, the amount should make sense when you consider the rest of your finances.
Someone in their late 50s who has consistently saved for retirement may face a different situation than someone who starts making a large contribution for the first time right before filing.
There is no reason to guess. Do not stop contributing simply because you think bankruptcy requires it. At the same time, do not increase the deduction because you assume retirement savings are automatically untouchable. Have the current amount reviewed first.
What Happens If You Are Repaying a Retirement Plan Loan
A retirement loan can complicate your Chapter 13 budget. Suppose you borrowed from your 401(k) and $350 comes out of every paycheck to repay it. Bankruptcy law generally gives qualifying retirement loan repayments special treatment while you are actually required to make them.
But that loan may end before your Chapter 13 case does. Imagine the loan will be paid off in 18 months, while your repayment plan lasts five years. Once that $350 payment disappears, you cannot necessarily keep treating it as though the expense still exists.
You may need to put the extra money toward the Chapter 13 plan. This is why your attorney needs more than the current balance. Bring the loan paperwork showing the monthly deduction and payoff date.
When Retirement Savings Could Affect Your Monthly Plan Payment
Retirement contributions can become a problem when the numbers suddenly change. Maybe you were contributing 2 percent of your paycheck for years and moved it to 10 percent three weeks before meeting with a bankruptcy lawyer. That kind of change may raise questions. The same could happen if you begin contributing for the first time while you are preparing to file.
That does not mean a recent change is automatically improper. There may be a reasonable explanation. The point is that you should discuss it before you file.
Your Chapter 13 plan has to work with your actual household budget. You still need money for groceries, utilities, transportation, insurance, and other normal expenses. A retirement deduction cannot be looked at by itself.
How a Bankruptcy Attorney Can Review Your Retirement Contributions
Bring your pay stubs and retirement statements to your bankruptcy consultation. If you have a 401(k) loan, bring that information too. Tell your attorney when the loan will end and whether you have recently changed your contribution percentage.
Those details can affect a plan that may last three to five years. Your attorney can look at the retirement deductions along with your income, debt, household expenses, and the amount creditors may need to receive. It is much easier to deal with a questionable deduction before filing than after a trustee objects to the plan.
Get Help With a Bankruptcy Case From Kain + Henehan
At Kain + Henehan, we help people throughout Minnesota look at the full financial picture before filing Chapter 13.
If you have spent years saving for retirement, you probably do not want to stop without knowing whether you have to. If you are repaying a 401(k) loan, you also need to know how that payment fits into the case.
We can review your retirement deductions, income, expenses, and debt before you decide what to do next. Call Kain + Henehan at (612) 438-8006 to schedule a free consultation and talk about whether Chapter 13 makes sense for your situation.