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Sixth Circuit Affirms Holding that Contributions to a 401(k) Plan Made More than Six Months Prior to Bankruptcy Cannot be Excluded from Disposable Income

401k File FolderThe U.S. Court of Appeals for the Sixth Circuit recently ruled in a case involving a Chapter 13 debtors’ attempt to shield contributions to a 401(k) retirement account from “projected disposable income,” therefore making such amounts inaccessible to the debtors’ creditors.[1] For the reasons explained below, the Sixth Circuit rejected the debtors’ arguments.

Case Background

This appeal involves the Chapter 13 bankruptcy filing of a husband and wife (the “Debtors”). The issue on appeal was whether the Debtors could exclude future 401(k) contributions from their disposable income and creditors. The Husband/Debtor’s work and prior 401(k) contribution history weighed heavily in the Sixth Circuit’s analysis.

  • Between 1993 and 2017, Husband/Debtor worked for a company that offered a 401(k) plan, and he regularly contributed a portion of his wages to the plan.
  • In 2017, he went to work for a new employer that did not offer a 401(k) plan, so he was unable to make contributions during his tenure there.
  • In May of 2018, he started working for a third company which had a 401(k) plan, and he resumed making 401(k) contributions.
  • The Debtors filed for bankruptcy in June of 2018.

As part of their petition, the Debtors sought to exclude $1,375.01 per month from their disposable income as voluntary contributions to Husband/Debtor’s 401(k) plan. The Chapter 13 Trustee objected to the exclusion and the bankruptcy court ruled in favor of the Trustee’s argument. The Debtors appealed to the District Court, which affirmed the bankruptcy court’s ruling, and then Debtors appealed to the Sixth Circuit.


As a general principle, a Chapter 13 bankruptcy debtor may obtain some relief from his/her debts while retaining his/her property. However, in order to receive such protection, a debtor must agree to and abide by a court-approved plan under which he/she pays creditors out of future income. In general, a debtor must commit all “projected disposable income” to the payment of creditors for a fixed period of time.

The Sixth Circuit explained that while the Bankruptcy Code does not define “projected disposable income,” it does define “disposable income” as a debtor’s “current monthly income . . . less amount reasonably necessary to be expended . . . for the maintenance or support of the debtor.” 11 U.S.C. 1325 (6)(2).

“Current monthly income” is defined as “the average monthly income from all sources” (other than those specifically excluded) “that the debtor [has] receive[d]” in the six months preceding filing for bankruptcy. 11 U.S.C. 101(10A).

This case, therefore, boiled down to whether the post-petition amounts the Debtors intended to contribute to a 401(k) plan constitute “projected disposable income.” The Sixth Circuit ruled that such amounts should be treated as projected disposable incomes that are available to pay creditors.

In its analysis, the Sixth Circuit noted that, prior to the 2005 amendments to the Bankruptcy Code, there was consensus among the bankruptcy courts that wages voluntarily withheld as 401(k) contributions formed part of a debtor’s disposable income. Therefore, such amounts were routinely available to unsecured creditors as part of a Chapter 13 plan.

After 2005, following the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), bankruptcy courts began adopting different approaches for the treatment of 401(k) contributions as disposable income.

The splintering of opinions—with four competing approaches adopted by different courts—resulted from what is known as the “hanging paragraph” in Section 541(b)(7)(A) of the Bankruptcy Code, which defines what property should not be included as “property of the estate” in a bankruptcy case. While Section 541(b)(7)(A) provides that amounts withheld by an employer for contribution to an employee’s 401(k) plan are to be excluded from property of the estate, the “hanging paragraph” at the end of the section states “except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2).”

In analyzing this case, the Sixth Circuit revisited its ruling in Davis v. Helbling (In re Davis), which also involved a debtor who sought to exclude future 401(k) contributions from disposable income. The key difference from this case, however, is that in Davis the debtor had been steadily making 401(k) contributions for at least six months prior to bankruptcy.

Accordingly, in Davis, the Sixth Circuit concluded that “the hanging paragraph is best read to exclude from disposable income a debtor’s post-petition monthly 401(k) contributions so long as those contributions were regularly withheld from the debtor’s wages prior to her bankruptcy.”

In this case, the Debtors did not make 401(k) contributions during the six months prior to bankruptcy. The Debtors argued that this shouldn’t matter, and grounded their arguments in equity. They urged the Sixth Circuit to consider the “totality of circumstances” and assess the husband’s “good faith.” They argued that the husband’s consistency in contributing to his 401(k) account in the years preceding the six-month lookback period should be relevant, and that Davis’ interpretation of the hanging paragraph “would be inequitable” on these facts.

The Sixth Circuit rejected all of these arguments. It held that “the bankruptcy code’s text does not permit a Chapter 13 debtor to use a history of retirement contributions from years earlier as a basis for shielding voluntary post-petition contributions from unsecured creditors.”

If you have further questions regarding this case or bankruptcy questions in general, contact Patricia Scott at 517.371.8132 or at pscott@fosterswift.com.

[1] Penfound v. Ruskin, No. 19-2200 (6th Cir., Aug. 10, 2021)

Categories: 6th Circuit Court of Appeals, Chapter 13

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