Ninth Circuit Rules Some Retirement Contributions "Necessary Expenses"
The Ninth Circuit in Hebbring v. U.S. Trustee, (9/11/06 04-16539), a pre BAPCPA case, ruled that a debtor may contribute to a retirement plan and not run afoul of the substantial abuse provisions of 707(b) of the Bankruptcy Code. The court upheld the bankruptcy court's determination that the thirty-three year old debtor's petition in this matter showing an annual income of $49,000.00, $11,124.00 in consumer credit card debt and monthly retirement contributions of approximately $300.00, constituted substantial abuse under section 707(b).
However, the court went on to say that the Bankruptcy Code does not, per se, disallow voluntary contributions to a retirement plan as a reasonably necessary expense in calculating a debtor's disposable income, but rather requires courts to examine the totality of the debtor's circumstances on a case-by-case basis to determine whether retirement contributions are a reasonably necessary expense for that debtor.
When determining whether a petition constitutes substantial abuse under Chapter 7, the court ought to "examine the totality of the circumstances, focusing principally on whether the debtor will have sufficient future disposable income to fund a Chapter 13 plan that would pay a substantial portion of his unsecured debt." Although the Third and Sixth Circuits have employed a per se rule that voluntary retirement contributions are never a reasonable expense, the Ninth Circuit found no evidence that Congress intended a per se rule against retirement contributions.
The Ninth Circuit has consistently found that section 707(b) does not create a "bright line test" for substantial abuse, but "commits the question of what constitutes substantial abuse to the discretion of the bankruptcy judges within the context of the Code." The court outlined several factors to consider when making this determination, including:
- The debtor's age, income, and overall budget;
- Expected date of retirement;
- Existing retirement savings and amount of contributions;
- The likelihood that stopping contributions will jeopardize the debtor's fresh start by forcing debtor make up lost contributions after emerging from bankruptcy;
- The needs of the debtor's dependents.
