shape
shape
shape
shape
shape
shape
9 October 2019 / Milos Gvozdenovic

Potential for Increased Dividends Based on Recent Appellate Decision

Topics: Bankruptcy


A recent appellate decision handed down by the United States District Court in the Eastern District of Michigan provides some good news for unsecured creditors seeking larger dividends in Chapter 13 cases.  The court affirmed a lower court ruling, in which it was determined “that Debtors’ voluntary post-petition contributions to a 401(k) account are part of disposable income.”  See Penfound v. Ruskin, Case No. 18-13333, 2019 U.S. Dist. LEXIS 160353 (E.D. Mich. Sept. 20, 2019) at 11.

 A Chapter 13 Debtor is under an obligation to commit all of their disposable income to their Chapter 13 plan as indicated in 11 U.S.C. § 1325.  The code section simply defines disposable income as the “current monthly income received by the Debtor.”  11 U.S.C. § 1325(b)(2).  There are explicit exemptions within the code for income that does not qualify as disposable income. Id. The code section also allows “reasonably necessary” expenses to be deducted from that income. Id. Anything remaining is committed to the Debtor’s Chapter 13 plan and distributed to creditors. Generally, the larger the disposable income amount, the more money that will be paid to unsecured creditors. 

The court in Pendfound relied heavily on the 6th Circuit decision in In Re Seafort, 669 F.3d. 662 (6th Cir. 2012).  The issue on appeal in Seafort was whether “the income that becomes available after the debtors have fully repaid their 401(k) loans … is ‘projected disposable income’ to be paid to the unsecured creditors.”  In Re Seafort, 669 F.3d. 662 (6th Cir. 2012) at 663.  The court in Seafort held that “post-petition income that becomes available to debtors after their 401(k) loans are fully repaid is known as ‘projected disposable income’ and must be turned over to the trustee for distribution to unsecured creditors.”  Id.  Seafort did not specifically address the issue of voluntary retirement contributions as disposable income in a Chapter 13, but it was addressed by the court within the footnotes of the case.  Penfound v. Ruskin, Case No. 18-13333, 2019 U.S. Dist. LEXIS 160353 (E.D. Mich. Sept. 20, 2019) at 10.  Although footnotes are not binding, the court in Pendfound found them to be heavily persuasive and felt that the 6th Circuit clearly “indicated its position on the issue.”  Id. at 10-11.

 As a result of the appellate court’s decision in this case, the original confirmation order in the Debtors’ Chapter 13 was upheld.  The Debtors were not allowed to voluntarily contribute to their 401(k) plan during the pendency of the Chapter 13 and their bi-weekly payments increased from $513.30 to $1,147.92.  Id. at 3.  This would result in an estimated net increase to unsecured creditors in the amount of $82,000. Id. at 2.  Hopefully, this is a trend we will continue to see across other districts and Debtors will be prohibited from reaping the benefits of padding their retirement savings at the expense of their creditors. 

Related News

Insights / 2 October 2020

Left in the Dark: Utility Shut-offs Resume Throughout the Country

While a total of 36 states previously barred electricity disconnections during the pandemic, 14 states moratoriums have already expired and the rest are following not far behind. That means, for an estimated 24 million American households, the possibility of their power now being shut off looms.
Read More
Alerts / 1 October 2020

Now in Effect in the Southern District of Ohio: Mortgage Modification Mediation Program

The United States Bankruptcy Court for the Southern District of Ohio adopted a Mortgage Modification Mediation Program (MMM Program), effective October 1, 2020. The goal of the program is to encourage debtors and creditors to reach a consensual resolution.
Read More
Alerts / 30 September 2020

Illinois Governor J.B. Pritzker Extends Garnishment and Eviction Prohibitions While the Circuit Court of Cook County Extends Foreclosure Moratorium Amidst COVID-19 Pandemic

On September 18, 2020, Illinois Governor J.B. Pritzker entered Executive Order 2020-55, which re-issues and extends the duration of Executive Order 2020-25 through October 17, 2020.
Read More

Join Our Email List

Get the latest articles and news delivered to your email inbox!
Subscribe

Contact The Author

Join Our Email List

Keep up-to-date with this topic and others by subscribing to our email list.

Subscribe