Under Chapter 13 bankruptcy, your debts are consolidated into a repayment plan lasting from three to five years. Your payments are made to a court-appointed trustee who then pays them to your creditors. Once you file your bankruptcy petition, an automatic stay goes into effect preventing foreclosure, repossession, lawsuits and other collection efforts by creditors. After successful completion of the repayment plan, any remaining debts are forgiven upon discharge of the case from bankruptcy court.
The amount of each month's payment under the bankruptcy plan is determined by your disposable income — your after-tax income less allowable living expenses. These allowable deductions are intended to provide you sufficient money to pay your necessary costs of living, such as food, day care, rent or mortgage payments, car payments and utilities. Any remaining income that is not deductible is designated for payment to your creditors.
Funds used for investment in stocks, bonds and other investment accounts do not qualify as allowable deductions of disposable income. Although reasonable contributions to a 401(k) account are not considered disposable income, they may be treated as an allowable expense depending on the circumstances. Therefore, when you file a Chapter 13 bankruptcy petition, you may be permitted to continue contributing to your retirement account.
In some circumstances, you may not be permitted to increase your 401(k) contributions or begin contributing to your 401(k) retirement account if you were not contributing to it prior to filing for Chapter 13 bankruptcy. The bankruptcy trustee, whose role is to protect your creditors' interests, may object to your placing these funds into your retirement savings instead of paying your creditors.