Read this blog to learn how bankruptcy law protects retirement for Lakewood residents based on a SCOTUS ruling. Although many bankruptcy practitioners would prefer not to see the words “bankruptcy” and “Supreme Court” in the same sentence, the Supreme Court recently made an important decision by simply staying out of a dispute that came from the Ninth Circuit Court of Appeals, which Ninth Circuit decision benefited Chapter 13 debtors.
Martha G. Bronitsky, Chapter 13 Trustee v. Jorden Marie Saldana, Case No. 23-15860.
The issue in Saldana was “whether voluntary contributions to employer-managed retirement plans constitute disposable income in a Chapter 13 bankruptcy.” In other words, is a debtor in Chapter 13 bankruptcy prevented from contributing to her employer-managed retirement plan during the 5 years of the Chapter 13 repayment period, and thus required to make every single penny of possible retirement contribution available to the Trustee, to pay back debts?
The bankruptcy court and US District Court had held that the contributions were part of Ms. Saldana’s bankruptcy estate, and thus available for debt repayment, as part of the debtor’s Chapter 13 plan.
However, the Ninth Circuit’s decision reversed this holding, and this reversal is consistent with most of the Circuit Courts in the US.
In June 2025, the US Supreme Court decided not to disturb this decision.
As part of the Court of Appeals decision, the US Trustee and the Ninth Circuit analyzed 11 USC Sec. 541(b), which states that contributions to an employer-managed retirement plan are not part of the bankruptcy estate. 541(b) specifically excludes from the bankruptcy estate earnings withheld by the debtor’s employer for 1) contributions to employer-managed retirement plans under Internal Revenue Sec. 414(d); or 2) part of a deferred compensation plan under IRC Sec. 457; and/or 3) a tax-deferred annuity under IRC Sec. 403(b).
The Ninth Circuit noted that there were at least four different formulae available to determine whether or not the contributions to the employer-managed retirement plan should instead be turned over to the Trustee for payment to creditors. The Ninth Circuit ruled that the contributions to Ms. Saldana’s employer-sponsored retirement plan did not qualify as “disposable income,” within the reach of the Trustee, under any of these formulae.
Moreover, in addition to the plain language of the 11 USC 541(b)(7), which explicitly excludes wages withheld for the employer-sponsored retirement plan, the Ninth Circuit could have based its holding on the basic theory of bankruptcy relief:
“The Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including “the exercise of exclusive jurisdiction over all of the debtor’s property, the equitable distribution of that property among the debtor’s creditors, and the ultimate discharge that gives the debtor a ‘fresh start’ by releasing him, her, or it from further liability for old debts.”
Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 363–64 (2006); N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982), cited in Grissel, “Stern v. Marshall – Digging for Gold and Shaking the Foundation of Bankruptcy Courts (or Not),” 72 Louisiana Law Rev. (2012), at 670.
Given the cuts to social services, and the ever-shrinking American social safety net, it would be inconsistent with the “fresh start” justification for bankruptcy, to further restrict the amount of funds that a debtor could save for retirement. Given the twin justification, that a bankrupt debtor should not become a “ward of the state,” it is completely reasonable for a bankruptcy court to vindicate the plain language of 11 USC Sec. 541(b)(7), and allow the debtor to continue to fund her retirement, during the 60 months of her Chapter 13 repayment plan.
THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, NOR CREATE AN ATTORNEY/CLIENT RELATIONSHIP. PLEASE CONSULT AN ATTORNEY!!
