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Saving for retirement during a Chapter 13 bankruptcy

When individuals or married couples file Chapter 13 bankruptcy petitions in South Carolina, they are expected to submit payment plans showing how much income they earn and the portion of this money that will be applied to their outstanding obligations. Checks and balances have been built into the system to make sure that creditors are not taken advantage of, and Chapter 13 payment plans must withstand the scrutiny of a bankruptcy judge. Judges can be difficult to please, and they sometimes raise objections even when all of the parties involved are in agreement.

A judge refused to confirm the Chapter 13 payment plan of a Louisiana couple in March 2017 because he felt that too much was being allocated to their retirement needs. Neither the bankruptcy trustee involved nor any of the couple's creditors had raised objections to the plan, but the judge ruled that 3 percent of disposable income was a more appropriate amount to set aside for retirement needs than the couple's proposed 18 percent. The couple's plan included deposits into a 401(k) account and payments on loans related to the account.

The judge stressed when making his ruling that saving for retirement was a sound financial strategy that Chapter 13 petitioners should be able to pursue. He also suggested that the couple's testimony had not convinced him of their good faith. He may also have been influenced by the several revisions made to the payment plan.

Attorneys with debt relief experience may be familiar with the checks and balances of the bankruptcy system, and they may take particular care with Chapter 13 payment plan proposals to avoid revisions and unnecessary scrutiny. Attorneys could also seek to avoid legal challenges by drafting proposals that are essentially fair to all parties involved.

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