MANY clients complain that their net income is small even though their gross income is big because they have large retirement contributions. Therefore, they need bankruptcy relief. For instance, client’s gross income is $10,000 monthly. But his net income is only $6,000 because his retirement contribution is 20% or $2,000 monthly. His deductions are $2,000 for FICA, social security & Medicare, and $2,000 for retirement, or total deductions of $4,000, leaving him a monthly take home pay of $6,000 from his gross monthly income of $10,000. It is understandable that client feels that he financially strapped because 40% of his gross income has been deducted from salary. But matters are not that simple when client seeks bankruptcy relief. Bankruptcy law distinguishes between ‘mandatory’ and ‘voluntary’ retirement contributions. Mandatory retirement contributions are done by force. Employee has no choice but to submit to the deduction. Employee has no choice but to agree with the deduction even if he does not want to make the contribution. However, voluntary retirement contributions are deducted because employee has asked the employer to make the deduction by employee’s own choice.
Mandatory retirement contributions are deductible from gross income under the Means Test when calculating disposable income. But voluntary contributions are not deductible. Voluntary retirement contributions are considered part of net income of debtor, rightly so. Debtor has chosen to make that contribution as part of his savings for retirement. Thus, the money being deducted is actually part of his net income. Even though the money doesn’t go into his checking account, the money is being squirreled away in a tax-deferred account for the benefit of the debtor by his own choice.
Even a voluntary retirement contribution may be deducted disposable income depending on certain circumstances. For instance, if debtor is nearing retirement age and has a small retirement account, the court may allow him to treat voluntary retirement contribution as a necessary expense under the Means Test. If debtor were middle-aged, his 401-k contribution would be treated as voluntary and not deductible under the Means Test. But if debtor was 60 years old and his retirement account was only $30,000, the court may treat his 401-k as a deductible necessary expense. What if his retirement account was $150,000? In Los Angeles, I heard a judge rule that $150,000 retirement account for living in Los Angeles to be insufficient to cover debtor’s retirement expenses. So, $150,000 may be considered more than sufficient if debtor lived in Death Valley.
In Re Kunkelman, Chapter 7 debtor was middle-aged and his pay-stub showed monthly contributions of $450 to a "savings/retirement account". The US Trustee objected that these contributions should be included in debtor’s disposable income. The court agreed. "This Court, while not adopting an absolute prohibition on the practice, has generally not permitted debtors to deduct against their disposable income allocations made for retirement savings, e.g. contributions made to a 401-k or other like accounts," the court said. Further: "In limited circumstances, however, contributions made for retirement savings may be permitted when calculating a debtor’s disposable income for purposes of §707 (b) (3). Particularly, if the debtor is at or near retirement age and has minimal savings for retirement… There also exists no evidence of other mitigating circumstances; for example, had the debtor’s health been raised as an issue in this case."
Hence, if you’re still far from retirement age, plan on becoming disabled first before deducting 401-k from your disposable income in the Means Test. The court may agree with your argument that having lost both arms and legs when your 2009 Lexus 250’s accelerator pedal got stuck on the rubber mat and would not stop until it crashed into traffic on the 10 freeway. Short of this, come and see me, there may be an easier way of qualifying you for bankruptcy eligibility without compromising your ambulatory capacity for the rest of your life.
If you need debt relief, contact my office. I will analyze your case personally.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published October 17, 2009 in Asian Journal Los Angeles p. C4 )
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