960 F.3d 346
6th Cir.2020Background
- Camille Davis filed Chapter 13 in 2017 with roughly $200,000 in debt, about $189,000 of it unsecured.
- Davis’s proposed plan relied on treating $220.66 in monthly employer‑withheld 401(k) contributions (made pre‑petition) as an allowable expense, yielding $323 monthly payments to unsecured creditors.
- The Chapter 13 Trustee objected, arguing those voluntary retirement contributions are part of "disposable income" under 11 U.S.C. § 1325(b)(2); the bankruptcy court sustained the objection citing Sixth Circuit dictum in Seafort v. Burden.
- Davis amended her plan to increase payments, objected to preserve the issue, and obtained certification for direct appeal to the Sixth Circuit.
- The legal dispute centers on the BAPCPA addition to 11 U.S.C. § 541(b)(7) (the "hanging paragraph") and whether it excludes pre‑petition employer‑withheld 401(k) contributions from "disposable income."
Issues
| Issue | Plaintiff's Argument (Davis) | Defendant's Argument (Trustee) | Held |
|---|---|---|---|
| Whether the § 541(b)(7) hanging paragraph excludes pre‑petition employer‑withheld 401(k) contributions from "disposable income" under § 1325(b)(2) | The hanging paragraph means such withheld amounts "shall not constitute disposable income," so regular pre‑petition payroll 401(k) contributions may be deducted from disposable income | The hanging paragraph only prevents pre‑petition 401(k) assets from being property of the estate (aggregate account value); it does not exempt ongoing (post‑petition) contributions from disposable income | The Sixth Circuit held the hanging paragraph is best read to allow a debtor to exclude monthly 401(k) contributions from disposable income where those contributions were regularly withheld pre‑petition; vacated and remanded |
Key Cases Cited
- Seafort v. Burden, 669 F.3d 662 (6th Cir. 2012) (rejected In re Johnson’s reasoning re: post‑petition contributions and contained dictum on hanging paragraph’s scope)
- Baxter v. Johnson (In re Johnson), 346 B.R. 256 (Bankr. S.D. Ga. 2006) (held hanging paragraph excludes 401(k) contributions from disposable income)
- In re Prigge, 441 B.R. 667 (Bankr. D. Mont. 2010) (interpreted hanging paragraph to protect only accumulated pre‑petition 401(k) savings, not ongoing contributions)
- Hamilton v. Lanning, 560 U.S. 505 (2010) (‘‘projected disposable income’’ is disposable income adjusted for known or virtually certain changes)
- Patterson v. Shumate, 504 U.S. 753 (1992) (pre‑filing ERISA‑qualified retirement plans excluded from property of the estate)
- In re McCullers, 451 B.R. 498 (Bankr. N.D. Cal. 2011) (adopted Prigge‑style reading that limits the hanging paragraph to pre‑petition accumulations)