When people living in California find themselves overwhelmed by debt, they may decide to file for bankruptcy. If they opt for Chapter 13 bankruptcy, they will be in a court-supervised debt payment plan for the next three to five years. During this time, much of the debtor's income gets earmarked for creditor repayment.
One challenge that sometimes arises during the repayment plan is retirement savings. Courts typically recognize that debtors will want to continue their retirement savings plans while in Chapter 13. Reasonable deposits into retirement accounts are incorporated into the debtor's budget.
A court recently held that it is acceptable for a Chapter 13 debtor to begin making payments into a retirement account. This decision was made after a bankruptcy trustee argued that a debtor should not be permitted to make deposits into a 401(k) with funds that could go toward repaying creditors. After review, the court decided it was permissible for a debtor to start making retirement contributions during a bankruptcy payment plan.
Cases like this demonstrate the complex issues that may arise during a bankruptcy. In some instances, debtors and bankruptcy trustees may have different interpretations of bankruptcy law and what is permitted during the repayment or discharge process. To protect the integrity of the plan and prevent the court from dismissing it, debtors may wish to be careful about making changes to their financial routine.
Couples and individuals who are considering bankruptcy may benefit from retaining legal counsel. A lawyer could review a client's case and make suggestions regarding debt relief options. In addition, the attorney may be able to represent the client in situations where there is a disagreement with a bankruptcy trustee over budgets, payments or money management.