Debtor can contribute to retirement plan

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When interpreting the Bankruptcy Code, sometimes you have to look beyond the black and white letter of the code, and view it as a whole.

So, even though Chapter 13 allows a debtor to make contributions to a retirement plan, but Chapter 7 does not, attorneys Arnold F. Lueders, III, and Brett J. Pfeifer, of Credit Solutions S.C. in Milwaukee, successfully argued last month that a Chapter 7 filer could continue to contribute to her plan, without running afoul of sec. 707's presumption of abuse.

Because the contributions were reasonable and longstanding, and the debtor led a modest lifestyle, U.S. Bankruptcy Judge Susan V. Kelley held that the Chapter 7 petition need not be dismissed or converted to Chapter 13.

When Kathern J. Mravik filed a petition under Chapter 7, her income exceeded the Wisconsin median, and after subtracting her allowed expenses, her disposable income was enough to trigger the "presumption of abuse" under sec. 707(b)(2)(A).

Relying on the presumption, the trustee moved to convert the case to Chapter 13 or dismiss the case. However, the court denied the motion, holding that the presumption of abuse was rebutted.

At issue were Mravik's contributions to her "457 plan," a retirement plan for government employees similar to a 401(k) plan. She had been making regular contributions to her plan for 15 years prior to filing bankruptcy.

Judge Kelley found that, because such contributions could be made under Chapter 13, Mravik's unsecured creditors would not receive anything, even if the plan were converted to that Chapter. As a result, Kelley held it was not abusive to file under Chapter 7.

At issue was sec. 707(b)(1), which states that a bankruptcy court "may" dismiss a case or convert it to Chapter 13 "if it finds that the granting of relief would be an abuse of the provisions of this chapter."

Subsection (b)(2)(B)(i) states that "the presumption of abuse may only be rebutted by demonstrating special circumstances."

Kelley acknowledged that Mravik could stop the contributions to her retirement plan, and thus failed to show "special circumstances."

Nevertheless, Kelley concluded that her failure to rebut the presumption of abuse by showing special circumstances does not require dismissal of the case.

Because the statute says that a judge "may" dismiss a case for abuse, rather than "shall," Kelley concluded that it provided discretion whether to dismiss.

Exercising that discretion, Kelley concluded, "[A] debtor who cannot afford to make payments to creditors in Chapter 13 or is not required to do so in light of Congressional deference to retirement savings is not abusing a Chapter 7 discharge."

Attorney Pfeifer acknowledged that not every Chapter 7 debtor would be able to benefit from the holding.

Here, Mravik had been making contributions for many years, but "If a debtor began doing so in anticipation of filing, it would be different," he said.

Younger debtors might not be able to benefit from the holding either, he recognized. The court wrote, "the burden of proof to show that the Debtor is young, healthy and far enough from retirement to replenish her retirement fund without hardship rests on the U.S. Trustee."

In some cases, Pfeifer said, the trustee would likely be able to meet that burden.