Chapter 13: Bankruptcy & Disposable Income

Since Chapter 13 bankruptcy doesn’t wipe out your debts but rather allows you to make payments to your creditors, making contributions to your retirement plan can be tricky since it reduces the amount of disposable income you have to make payments. If you wish to make voluntary retirement contributions, talk to your bankruptcy attorney first, so that you don’t violate any parts of your agreement.

Chapter 13 Bankruptcy and Disposable Income

When you file for Chapter 13 bankruptcy, the court will determine how much you have to repay your debts based on an overall picture of your financial situation, including your income, assets, expenses, and the types of debt you have. You are required to use your disposable income to pay off your creditors. Your disposable income is the amount of money you have left over after paying for expenses for yourself and your dependents that the court has deemed legitimate. When it comes to voluntary retirement contributions, questions arise about whether those contributions should be considered to be legitimate expenses or if the money you wish to put into your retirement accounts is coming from your disposable income, which should be going to your creditors.

Voluntary and Non-Voluntary Retirement Savings

During Chapter 13 bankruptcy, you are allowed to make any mandatory retirement contributions, such as those required by your employer or repayments from a retirement account loan. For voluntary contributions, the rules differ depending on your jurisdiction. Although some courts prohibit these contributions across the board, others consider them on a case-by-case basis. If you wish to make voluntary contributions, talk to your bankruptcy attorney to find out how to make your appeal to your court, if you are eligible in your jurisdiction.

For questions about bankruptcy and your options, schedule an appointment at Cutler & Associates, Ltd. Our bankruptcy attorneys in Aurora and Schaumburg can help you choose the right way forward to get a fresh start in your financial life.