Sixth Circuit Limits Bankruptcy Protection for 401(k) Contributions, Aug. 19, 2021

The Sixth Circuit Court of Appeals has confirmed that 401(k) contributions made by debtors in Chapter 13 bankruptcy are not always protected if the debtors had not regularly contributed to the account in the six months prior to filing bankruptcy. In other words, debtors cannot shield assets from bankruptcy by beginning to make contributions after filing for bankruptcy. In this case, the court denied the debtors' request to exclude $1,375 per month from their disposable income to contribute to a 401(k). The court found this denial was correct even though the debtor had made contributions in the past, but stopped because he accepted a new job that did not offer a 401(k) savings option. However, in a similar case where the debtor had been making regular 401(k) contributions in the six months prior to bankruptcy, the debtors were permitted to withhold their contributions from disposable income. For more information on the tax treatment of 401(k) funds in bankruptcy, see Q 3912.