In general, a pension is an asset. However, the question is whether a bankruptcy debtor can fully exempt and keep their pension. The bankruptcy code permits a debtor to exempt and keep their entire pension, if the pension is ERISA (Employee Retirement Income Security Act) qualified. In other words, the pensions must be legitimate under the tax code.
ERISA permits two types of pensions, defined benefit plans and defined contribution plans. The defined benefits plans, promises to pay a retired individual a specific monthly amount based on different factors, such as a percentage of income earned and the years of service of the employee. The defined contribution plans are plans that are funded from the employee and possibly the employers’ contributions over the years of service.
At retirement, the employee is entitled to the available funds that have accumulated from the funds’ investments. The following are examples of defined contribution plans: employee stock ownership; 401(k); 403(b); and, profit-sharing plans. Typically, in a chapter 13 and 7, all of the above referenced plans are fully exempt under the bankruptcy code, with few exceptions. This means that a debtor can keep all of the funds in the plan.
The other issue pertains to whether a debtor may use as an expense, the monthly payments of the pension plan contribution. Typically, in a chapter 7, a debtor may only use a monthly pension contribution payment as a monthly expense, if the monthly contribution is required. An example is a New Jersey state employee’s monthly pension contribution. However, in general, an employee of a private company is not required to contribute to their pension. Therefore, under this scenario, the monthly contribution is not permitted as a legitimate monthly expense on the petition. Typically, the chapter 7 trustees will allow the debtors to use any monthly pension loan contribution as a legitimate monthly expense.
Similar to a chapter 7, a chapter 13 debtor is permitted to use any monthly pension loan contribution as a legitimate monthly expense. In a chapter 13, a debtor may use as an expense, a monthly contribution to a pension, even though the contribution is not required by law. However, the monthly contribution must be reasonable.
Please call the Law Offices of Robert Manchel at 1 (866) 503-5655 to get answers to your questions.