IN RE PARKS: The End of 401k Deductions in Chapter 13 Bankruptcy?

file0002131223244-thumb-375x281-49371A recent Appeals Court has ruled that a Chapter 13 bankruptcy debtor can’t continue to take paycheck deductions for a 401k account (In Re Parks, Case No. 11-60050 (9th Cir. Bap Aug. 6, 2012)The Court also decided that a 401k-loan deduction could continue during the plan. Courts across the Nation are still split about whether the 401k contribution can continue after filing the 13, but most Courts agree with each other that 401k loan payments can be used as a continuing budget item.

In the Parks case, the debtor included the 401k deductions in the means test and on the schedule I, which is a schedule of his income and withholdings from income looking forward in time.

He had a negative $40.00 on the means test, partially as a result of taking the 401k deductions of $318.00. He had a positive amount leftover to pay all creditors of $886.00 looking forward on schedules I and J (budget).

Because the Means test was negative, the debtor’s plan proposed a payment of $475.00 per month.

The Chapter 13 Trustee filed an objection and made the argument that Mr. Parks Shouldn’t be allowed to continue to the 401k deductions and that amount should be included in the plan payment when Bankruptcy Code Sections 541 (b)(7)(A) and 1306 are read together.

The Appeals Court agreed. It stated that Section 541(b)(7)(a) excludes retirement account payments from the bankruptcy estate, it also excludes the contributions from section 1325’s definition of what is disposable income so the exclusion only should apply to 401k funds ALREADY contributed to the 401k account as of the date of filing.

Based on this the Court reasoned that the ongoing deductions weren’t covered by Section 541(b)(7)(A) and weren’t allowed.

Conclusion

Arizona Bankruptcy Filers may not be able to continue 401k deductions in Chapter 13 Bankruptcy

 

Want to Negotiate IRS Debt? One way to ensure that it never happens

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You have some IRS debt and have figured out that if you can’t pay it, the IRS will collect it by seizing your paycheck, bank account etc.

You don’t want that to happen of course, and you’ve heard that the IRS may even agree to a payment plan or even a settlement of the debt, so you give the folks at the IRS a call.

A mildly impatient IRS collections employee answers after an eternity on hold. He asks you some questions and then asks whether you can pay the debt in full. You reply that you can’t, but would like to arrange a payment plan or even settle the debt.

Problem

‘Hold on a minute” he says, “I see here that you haven’t filed some tax returns, and even though you’re self employed, you haven’t made any estimated tax payments for several months”.

“We can’t discuss “negotiation” until you are “compliant. You have to file the missing tax returns and submit some estimated payments”. (If employed, you would need to correct your withholding amount).

Solution

You have to be willing to become “compliant” or in English…file the missing tax returns and or pay your tax with-holdings. If you don’t, there isn’t anything anyone can do to stop the IRS long term.

The IRS considers compliance the same as putting skin in the game or showing that you desire to live up to your end of the bargain. You don’t do it, they keep collecting.

If you have missing tax returns, get some help to figure out which returns need to be filed. If you haven’t been withholding get some help to figure out how much you should and start doing it.

Then…you can negotiate with the IRS. We can help.