I continue to be a student of bankruptcy law in action. Even after more than twenty years serving as a consumer bankruptcy specialist in Indiana, in order for me to offer my clients the most accurate information and advice I follow bankruptcy court cases in other states as well as here.
Last month there was an important ruling by a bankruptcy judge in Massachusetts. By way of quick review so you’ll understand the background, in a Chapter 13 bankruptcy the debtor must have enough income to make payments to creditors under a three to five year plan supervised by the bankruptcy court trustee. Once the basic monthly bills and living expenses are paid, the debtor is expected to use the rest of his or her income towards repaying creditors.
Well, in this case a woman had filed bankruptcy under Chapter 13 and her repayment plan had been approved by that Massachusetts court. At the same time, this woman was making contributions to her 401K plan at work. You might think the court would tell her to stop making 401K contributions for retirement until she’d finished paying off her debts. But the court ruled instead that she should be allowed to “pay herself first” by saving for retirement. Not only were the contributions exempt from current income tax (see Money Double Exempt in 401K), but the bankruptcy court followed a policy of protecting a person’s right to save for retirement, even when that slowed down the process of repaying debt.
This all goes back to the fact that the bankruptcy system is designed to serve as a safety net and to give people a chance to rebuild their lives and to have a secure future despite their present troubles. Helping people navigate through the system has been my work for all my professional life, and I was very, very gratified to read how that system continued to work effectively in the case of the woman in the Massachusetts bankruptcy court.