Cite as: Keith M. Lundin, Lundin On Chapter 13, § 46.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
Property of the estate in Chapter 13 cases is changed by BAPCPA. Section 1306 was untouched, but § 541 was amended by BAPCPA in several ways that directly affect Chapter 13 cases.
Section 541(b) identifies property that does not become property of the estate in a bankruptcy case. Section 1306 incorporates and expands upon § 541 to define property of the estate in a Chapter 13 case. Every exclusion added to § 541(b) by BAPCPA becomes an exclusion from the estate in a Chapter 13 case under § 1306. Property that is excluded from the Chapter 13 estate is not valued for purposes of the best-interests-of-creditors test at confirmation under § 1325(a)(4).1 Some of the exclusions added by BAPCPA to § 541 could be large numbers, even in consumer Chapter 13 cases.
There are four new exclusions from property of the estate that are of particular interest in Chapter 13 cases:
Education individual retirement accounts (§ 541(b)(5)). Subject to some dollar limitations and specificity of beneficiaries, funds in an education individual retirement account are not property of the Chapter 13 estate.2 The beneficiary must be a child, stepchild, grandchild or stepgrandchild of the debtor,3 and legally adopted or foster children can qualify.4 To be excluded from the estate, the funds must have been placed in the education IRA at least 365 days before the petition. Funding for the same beneficiary between 365 and 720 days before the petition is limited to $5,000.5 Funds in the account cannot be pledged or promised in connection with any loan and other restrictions may apply under the Internal Revenue Code.6 There is a new duty to file a record of education individual retirement accounts in every Chapter 13 case.7
Tuition credits and tuition programs (§ 541(b)(6)). Funds used to purchase a tuition credit or contributed to a qualified state tuition program more than 365 days before the petition are not property of the estate.8 The beneficiary must be a child, stepchild, grandchild or stepgrandchild of the debtor, including adopted and foster children.9 The amount excluded from property of the estate is limited by § 529(b)(7) of the Internal Revenue Code. Funds paid or contributed between 365 and 720 days before the petition are excluded from the estate only to the extent of $5,000 per beneficiary.10 There is a new duty to file a record of any interest in a qualified state tuition program.11
Withheld or received contributions for employee benefits (§ 541(b)(7)). Perhaps most importantly for Chapter 13 debtors, there is a new exclusion from property of the estate for any amount “withheld by an employer from . . . wages” or “received by an employer from employees” as contributions to an employee benefit plan, a deferred compensation plan, a tax-deferred annuity or a health insurance plan.12 Also, amounts withheld from wages or received by an employer “shall not constitute disposable income” as defined in § 1325(b)(2).13 401(k) contributions fall within this exclusion from the Chapter 13 estate.14
Pawned property beyond redemption (§ 541(b)(8)). There is a new exclusion from property of the estate for any interest of the debtor in tangible personal property pledged or sold as collateral for a loan when the property is in the possession of the pledgee, the debtor has no obligation to repay or redeem and the debtor did not timely exercise any right to redeem under contract or state law.15 This exclusion is subject to the avoidance and recovery powers of a trustee or debtor.16
These new exclusions from property of the estate raise new issues for Chapter 13 debtors and counsel. The exclusion for pawned or pledged property beyond redemption could add urgency to the filing of a Chapter 13 petition.17 If the end of a redemption period looms under contract or state law, filing the Chapter 13 petition before the redemption period expires is essential to any effort by the debtor to recover the pledged property. A debtor eligible for an employee benefit plan, deferred compensation plan or health insurance plan may need to initiate (or modify) withholding by an employer before filing the Chapter 13 case to maximize the new exclusion in § 541(b)(7).
The new exclusion from disposable income of contributions to a retirement plan in § 541(b)(7)(A)(i) and (ii) is oddly worded: “except that such amount under this subparagraph shall not constitute disposable income, as defined in section 1325(b)(2).”18 It is not clear what “except” means in this sentence. The rest of the “subparagraph” creates an exclusion from property of the estate; what would an exception to an exclusion be in this context? And the exception described in the rest of the sentence is not an exception to the exclusion from property of the estate but is an exception from disposable income in another section altogether, § 1325(b)(2).
In the § 1325(b) context, there persists a debate whether property that is not property of the Chapter 13 estate can be “income” for purposes of the disposable income test.19 Detailed elsewhere,20 BAPCPA fundamentally redefines disposable income, beginning with “current monthly income.”21 The word “income” remains relevant to the determination of projected disposable income after BAPCPA. The sentence quoted from new § 541(b)(7)(A)(i) and (ii) will fuel the conclusion that disposable income includes income that is not property of the estate: there was no need for a specific “exception” from disposable income in § 541(b)(7) if employee benefit contributions ceased to be income upon exclusion from the Chapter 13 estate.
1 See §§ 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation, 161.1 [ Exemption Issues ] § 90.2 Exemption Issues and 464.1 [ New Exclusions and Exemptions ] § 90.3 Exclusions and Exemptions after BAPCPA.
2 See 11 U.S.C. § 541(b)(5).
3 11 U.S.C. § 541(b)(5)(A).
4 See 11 U.S.C. § 541(e).
5 11 U.S.C. § 541(b)(5)(C).
6 See 11 U.S.C. § 541(b)(5)(B).
7 See 11 U.S.C. § 521(c), discussed in § 381.1 [ Record of Education Individual Retirement Account ] § 36.34 Record of Education Individual Retirement Account.
8 11 U.S.C. § 541(b)(6).
9 11 U.S.C. § 541(b)(6)(A), (E).
10 11 U.S.C. § 541(b)(6)(B), (C).
11 See 11 U.S.C. § 521(c), discussed in § 381.1 [ Record of Education Individual Retirement Account ] § 36.34 Record of Education Individual Retirement Account.
12 11 U.S.C. § 541(b)(7)(A).
13 See 11 U.S.C. § 541(b)(7)(A)(i) and (B)(i), discussed in the context of the disposable income test in 11 U.S.C. § 1325(b)(2) in § 492.1 [ Employee Benefit Plan Contributions ] § 99.5 Employee Benefit Plan Contributions.
14 In re Njuguna, 357 B.R. 689, 690 (Bankr. D.N.H. 2006) (“[P]roperty listed in section 541(b) does not become part of the bankruptcy estate. Section 541(b)(7) lists 401k contributions. Thus, 401k contributions are not property of the bankruptcy estate. Property that is not part of the bankruptcy estate is not subject to being considered for any part of a Chapter 13 plan.”).
15 11 U.S.C. § 541(b)(8), discussed in § 453.1 [ Pawn Transactions ] § 78.8 Pawn Transactions after BAPCPA.
16 See § 50.1 Turnover of Property, § 50.2 Relief from Garnishments, § 50.3 Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances, § 50.4 Avoidance Powers after BAPCPA, § 50.5 Preferences after BAPCPA, § 50.6 Fraudulent Transfers after BAPCPA, § 50.7 Postpetition Transfers and § 53.12 Avoidance and Recovery Powers.
17 See § 386.1 [ Timing Considerations after BAPCPA ] § 37.3 Timing Considerations after BAPCPA.
18 11 U.S.C. § 541(b)(7)(A)(i) and (ii), also discussed in § 492.1 [ Employee Benefit Plan Contributions ] § 99.5 Employee Benefit Plan Contributions.
20 See § 92.1 In General.
21 See 11 U.S.C. § 101(10A), discussed in §§ 379.1 [ Form B22C: Statement of Current Monthly Income ] § 36.19 Form 122C-1: Statement of Current Monthly Income and 468.1 [ Current Monthly Income: The Baseline ] § 92.3 Current Monthly Income: The Baseline.