In re Jones

1

In re: JAMES THOMAS A. JONES, Debtor.

No. 24-80205

United States Bankruptcy Court, C.D. Illinois

September 18, 2024

OPINION

Peter W. Henderson United States Chief Bankruptcy Judge

The Chapter 13 Trustee has objected to the Debtor's plan. He currently commits $305 per month to repay a retirement loan that will be completely paid off in July 2026. The Trustee argues that he should be required to increase his monthly plan payments by $305 once the loan is paid off. The Debtor instead proposes to contribute those extra funds to his ERISA-qualified, employer-sponsored retirement plan. Because the Debtor is entitled to direct those funds towards a qualified retirement plan rather than his unsecured creditors under the Bankruptcy Code, the Trustee's objection will be overruled. The plan may be confirmed once the Debtor (1) resolves the Court's concern about his income on Schedule I and (2) inserts a provision requiring him to make the retirement contributions he proposes in month 29 of the plan.

I. Background

The Debtor filed a Chapter 13 bankruptcy petition in March 2024. His schedules disclose that he earns gross income of $7,286.93 per month. His take-home pay, after payroll deductions, totals $4,748.01. He calculates his monthly expenses to be $4,208.51, leaving $539.50 as monthly net income. He has two dependents. His average monthly income for the six months preceding the bankruptcy filing was $7,134.13 which is below the median for a household size of three in Illinois. The Debtor filed a plan that commits $536 per month to his creditors for a period of 40 months, for a total of $21,440. The plan will pay approximately 56% of the filed general unsecured claims.

The Chapter 13 Trustee has lodged two objections to the plan. First, she believes that the Debtor's income is understated. The pay advices provided to the Court show that the Debtor earned a total of $90,938.47 in 2023, for an average monthly income of $7,578.20-about $300 more than he claimed on his schedules. The Trustee requested that the Debtor file an amended Schedule I to reflect the higher number, but he believes he has it right, asserting that his income in 2022 and 2023 was $84,641.49 and $88,938.47 respectively. The Court does not understand the Debtor's math. Averaged together, over 24 months the Debtor earned $7,232.50 per month, but that figure is not the one listed on Schedule I, nor would it be appropriately listed because Schedule I is intended to capture current income, which appears to be higher. (The Debtor's figure for 2023 reflects monthly income of $7,411.) The Trustee's request that the Debtor file an amended Schedule I is well taken and will be granted. The parties are always free to agree upon a number they both feel accurately represents the Debtor's income.

A dispute over income is not the main event, though. The Debtor represents that now and at the time of filing he contributes 10% of his gross income to his employer-sponsored retirement plan, proof of which is established by the pay advice immediately preceding his bankruptcy filing. The Trustee notes that since September 2023, he has contributed 8% of his gross income to those accounts. It is undisputed that the Debtor's contributions are withheld from his wages for payment as contributions to an ERISA-qualified employee benefit plan. See 11 U.S.C. §541(b)(7).

The Debtor is also currently repaying a loan he took out against his retirement accounts. He pays $305 per month towards the loan, which will be fully repaid in July 2026. Once the loan is paid off, in what will be month 29 of the plan, the Debtor wishes to increase his voluntary contributions to the retirement programs by $305. The Trustee objects to that proposal and argues that the now-freed-up $305 should be committed to the plan for the benefit of general unsecured creditors from month 29 onwards.

II. Analysis

The dispute over a debtor's ability to increase his voluntary contributions to an ERISA-qualified, employer-sponsored retirement program during a Chapter 13 plan period is not a new one, although this judge has not yet had an opportunity to weigh in. See U.S. Trustee v. Kubatka (In re Kubatka), 605 B.R. 339, 361-63 (Bankr. W.D. Pa. 2019) (citing cases). The Court doubts it has much new to say about the subject apart from picking one of the three prevailing views of the issue. Still, it is worth explaining why only one approach appears to be consistent with the text of the Code and the reason Congress enacted the applicable statutory provisions that govern. See Baxter v. Johnson (In re Johnson), 346 B.R. 256 (Bankr. S.D. Ga. 2006). Happily it is the approach favored by most bankruptcy courts. Kubatka, 605 B.R. at 361.

A. A Chapter 13 debtor is entitled to make qualified retirement contributions that will reduce his disposable income under §1325(b).

Section 1325(b)(1)(B) of the Code does not permit a court to confirm a Chapter 13 plan over the trustee's objection unless the plan "provides that all of the debtor's projected disposable income to be received in the applicable commitment period … will be applied to make payments to unsecured creditors under the plan." The Code does not define "projected disposable income," but it does define "disposable income" for purposes of §1325(b) as "current monthly income received by the debtor … less amounts reasonably necessary to be expended" for the maintenance and support of the debtor and his dependents. 11 U.S.C. §1325(b)(2). "Current monthly income" is itself a defined term, but its contours are not relevant here. 11 U.S.C. §101(10A)(A)(i). Instead, the debate here centers around a provision, not in §1325, but in §541(b):

Property of the estate does not include … any amount … withheld by an employer from the wages of employees for payment as contributions … to [a qualified retirement plan] … except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2).

11 U.S.C. §541(b)(7)(A). A similar provision applies to money "received by an employer from employees for payment" to a qualified retirement plan; that money too "shall not constitute disposable income as defined in section 1325(b)(2)." Id. §541(b)(7)(B).

So when determining disposable income, a debtor need not include earnings that are withheld or contributed through his employer to a qualified retirement plan. That is what the statute plainly says. "Such amount … shall not constitute disposable income" under §1325(b)(2). There is no ambiguity.

The Trustee argues that §541(b)(7) refers only to prepetition contributions. "It makes little sense to place a post-petition disposable income exception in [§541]," she argues, because that section "identif[ies] what assets come into the estate at commencement." Doc. #34 at 4 (emphasis in original). Instead, she contends, Congress would have placed the provision in Chapter 13, like the provision excepting retirement loan repayments, 11 U.S.C. §1322(f), if it had intended to account for post-petition earnings. Sensibly placed or not, the language in §541(b)(7)'s hanging paragraph ("except that such amount …") is unambiguous: qualified retirement contributions are not disposable income under §1325(b)(2). No statute other than §1325(b)(2) informs the determination of projected disposable income under §1325(b)(1)(B). This Court, like the majority of bankruptcy courts, will not disregard explicit statutory directives on the view that they should have been codified on a different page of the Bankruptcy Code. See In re Garza, 575 B.R. 736, 747 (Bankr.S.D.Tex. 2017) (citing cases).

Besides, putting the directive in §541 isn't that strange. Chapter 5 applies in cases under Chapters 7, 11, 12, and 13. 11 U.S.C. §103(a). Chapters 11 and 13 both rely upon the definition of disposable income in §1325(b)(2). 11 U.S.C. §§1129(a)(15)(B), 1325(b)(1)(B). What better place to put a directive about specific retirement contributions not qualifying as disposable income under two different chapters than in Chapter 5 next to the very particular definition of those contributions?

The Trustee's argument centers on the interplay between §541(a) and §541(b)(7). Section 541(a)(1) defines property of the estate broadly to include "all legal or equitable interests of the debtor in property as of the commencement of the case," except as provided in §541(b) and (c)(2). Section 541(b)(7) excludes from the estate "any amount" withheld by an employer from the wages of employees, or any amount received by an employer from employees, for payment as contributions to an ERISA-qualified retirement plan. Because §541(a) is temporally limited to the "commencement of the case," the Trustee argues, the exception in §541(b)(7) must be similarly limited. The Trustee's position is supported by In re Seafort, in which the Sixth Circuit read §541(b)(7) "in the larger context of §541(a)(1)" and concluded that "Congress limited the type of contributions … that would be excluded from disposable income, namely those 'under this subparagraph,' §541(b)(7)(A), which in turn governs only those contributions in effect as of the commencement of a debtor's bankruptcy case, per §541(a)(1)." 669 F.3d 662, 672-73 (2012).

Seafort used the wrong context and ignored the plain text. Section 541(b)(7)(A) says that "such amount under this subparagraph shall not constitute disposable income." "Such" is a pointing word (a "deictic term") that points directly at an antecedent. Bryan A Garner, Garner's Modern English Usage 706-07, 873 (4th ed. 2016). Our "such" points to the amount under this subparagraph, that is, "any amount" of qualified contributions as defined in subparagraph §541(b)(7)(A) and (B).^[1] "Such amount" does not point to §541(a)(1) or its limitation to...