Asked over 2 years ago - Mukilteo, WA
FlagI am filing Chapter 13. Am I allowed to put money in a savings account during my repayment plan in case of car repairs or medical bills etc? Also, am I allowed to contribute to a new 401K or existing traditional IRA?
First, I must say that if you are filing Chapter 13, you are walking a dangerous path if you go it alone. The rules regarding 13s are a labyrinth, and if one of your creditors objects to your plan or decides to sue, it may be somewhat difficult to find representation on these matters if you did not have representation all along. For a more complete discussion on proceeding without an attorney take a look at the U.S. Courts' website (see the link).
As to your substantive question. As the other answers have indicated, when a Chapter 13 plan is setup the court allows certain amounts for different sorts of expenses. Because nobody has exactly the same expenses for each budget item each month, it is generally expected that these costs will ebb and flow... So no, its not horrible for you to accumulate some unused but budgeted funds... However, on the other end, the Trustee (the person who is responsible for managing and distributing the funds generated by your plan) may start wondering what is going on if you are accumulating quite a bit of cash. Because Chapter 13s are generally a best effort plan, his job is to make sure that if your circumstances improve significantly, that your plan payment will go up (but usually this is due to increased income).
Another thing to keep in mind is that if your circumstances change for the worse (say if your car dies or if you experience unusual medical bills), you may also be allowed to amend your plan accordingly. If this happens, it is important to get in contact with the Trustee and get an amended plan in the works as soon as possible, so that you avoid the possibility of failure. As in everything else involved with Chapter 13, the involvement of an attorney will be a great help.
You are allowed to continue making retirement contributions during the repayment plan. You should begin this before you file so your plan payment will be reduced accordingly. There is no easy way for you to save (non-retirement) once you are in the payment plan since the plan is designed to pay all of your "disposable income" to creditors. You should speak with an attorney to plan the best way for you to accomplish your goals without causing any problems in your bankruptcy case (or *gasp* charges of fraud or bad faith).
The objective in a Chapter 13 case is to obtain approval of a Chapter 13 plan leading to a discharge of your debt. In most instances a Chapter 13 plan requires payment of all disposable income to the Chapter 13 trustee. However, disposable income is calculated by subtracting budget expenses from your income. Car repairs and medical bills are expected during the term of the Chapter 13 plan and will be included in your budget. However, you are not required to spend a level budget amount for car repairs and medical bills every month. There is nothing to prevent you from putting money into a savings account to be used for the car repairs and medical bills as they are needed.
This is a very basic question that any experienced bankruptcy attorney you have help you with your case should be able answer for you.
If you are thinkinf of pursuing your Chapter 13 without help from an attorney, you should reconsider. By not having an attorney you will avoid some administrative expenses and potentially increase the amount of the distribution to your creditors. However, most Chapter 13 plans are "best effort" plans. This means that you pay your disposable income to the Chapter 13 trustee for 3 to 5 years even if little or no distributions are made to your unsecured creditors. In a best effort plan, reducing the administrative expense may make no difference in the amount you actually pay under your Chapter 13 plan. However, not having the assistance of an attorney can make a big difference in the amount of stress you experience in processing your case, and it may make a difference in the outcome of your case.
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