In general, upon the filing of the bankruptcy case, all of the debtor’s property is included in the bankruptcy estate. In a chapter 7, the debtor can keep all property that has low equity or value. Although unusual, if the debtor owns property with substantial value that exceeds the amount of the allowable exemptions, the trustee may be permitted to sell the property. In the event that the debtor owns property with substantial value, the debtor may wish to keep the property by filing a chapter 13 case, and making a monthly payment to the trustee that is commensurate with the property value.
There is certain property that is not included in the bankruptcy estate, no mater the value. “Employee Retirement Income Security Act” (ERISA) qualified retirement plans, such as an: IRA; SEP; employee pension plan, 401k and 403b, are the type of property that is not included in the bankruptcy estate. This means that no matter the value of the retirement plan, the debtor may continue to hold the funds in the account, which will not be included as the debtor’s property.
In chapter 7 and 13 cases, the court requires the debtor to complete two analysis’ to determine the debtor’s monthly disposable income. One analysis is called the Means Test or Current Monthly Income Test and the second test is a comparison of the debtor’s projected income on schedule I, and their monthly expenses on schedule J. In a chapter 7, the debtor may not have any monthly disposable income. In a chapter 13, the debtor must make monthly payments to the trustee, that are no less than the debtor’s monthly disposable income.
Typically, a chapter 7 debtor may use as a legitimate expense any monthly payments for a required (involuntary) pension contribution and payments regarding a pension loan. However, if the pension contribution is not required, the monthly payment, cannot be deducted and used as an expense. However, a chapter 13 debtor may use as an expense, voluntary or non voluntary contribution payments for a pension and payments for a pension loan.
Usually, a New Jersey State or local government employee is required (involuntary) to contribute to his pension and an employee of a private company is not required to contribute to his pension.
Please contact NJ consumer bankruptcy attorney Robert Manchel at 1 (866) 503-5655, for questions about how bankruptcy deals with retirement plans.