Can I increase a 401k contribution to minimize disposable income for a chapter 13 bankruptcy case?

Yes, and it may be a good idea. If you increase the amount you contribute to a qualified retirement account, you can reduce the amount of your disposable income in a Chapter 13 case. This essentially means that your unsecured creditors get a bit less, while you are allowed to save more during your plan. However, if you increase the amount by too much, you might get in trouble.

Retirement Contributions are Exempt

The U.S. bankruptcy code exempts voluntary 401k contributions from “property of the bankruptcy estate” and these contributions are excluded from the disposable income calculation in Chapter 13 repayment cases. You can use future 401k contributions made during your bankruptcy case to reduce your projected disposable income calculation on the Chapter 13 means test. This reduction is dollar-for-dollar, so maxing out your monthly 401k contribution is a good way to reduce disposable income.

(To learn more about the role of disposable income in Chapter 13 bankruptcy, see Chapter 13 Laws: Your Disposable Income.)

Beware of Changing Your Contributions Too Much

Saving for your retirement is a wise investment and is permitted during a Chapter 13 bankruptcy.  But if you increase your monthly pension contributions by a large amount on the eve of bankruptcy, the bankruptcy trustee might consider this to show a lack of good faith and object. However, trustees tend not to scrutinize small increases of less than 10%. And if you are near retirement age and don’t have a large next egg, the trustee may allow you to increase your contributions even more.

It’s always wise to check with a local bankruptcy attorney to find out the customs and practices in your area.

For more on Chapter 13 and details on how the plan works, check out our section on Chapter 13 Bankruptcy and the Repayment Plan.