A federal appeals panel in San Francisco held people seeking to file Chapter 13 bankruptcy can exclude contributions to qualified employer-managed retirement plans when calculating disposable income.
A three-judge panel of the U.S. Ninth Circuit Court of Appeals issued the 2-1 ruling Nov. 22, overturning a decision from U.S. District Court Judge Beth Freeman. Judge Sidney Thomas wrote the majority opinion; Judge Gabriel Sanchez concurred. Judge Consuelo Callahan dissented.
According to court records, Jorden Saldana voluntarily filed for Chapter 13 bankruptcy protection in April 2022. While working as a surgical technician, earning about $101,776 annually, “Saldana declared bankruptcy to reorganize her finances and seek relief from around $8,549 in unpaid taxes and $56,045 in other unsecured debts,” Thomas wrote.
Because Saldana’s income exceeded the median, her plan was subject to a means test adopted from Chapter 7 of the bankruptcy code and using IRS standards for necessary expenses. While calculating her disposable income, Saldana excluded $601 in monthly retirement plan contributions. She pledged to pay $300 per month for five years, but Chapter 13 trustee Martha Bronitsky objected because the plan “did not devote all of Saldana’s disposable income to repaying unsecured creditors” and requested more information about the retirement plan.
After further exchange of information, a federal bankruptcy judge sustained Bronitsky’s objection. Saldana continued to amend her certifications, but when the bankruptcy court confirmed her final plan, she asked for a direct appeal to the Ninth Circuit, a request the court rejected.
Judge Freeman then affirmed that bankruptcy court, allowing Saldana to ask the Ninth Circuit “whether voluntary contributions to an employer-managed retirement plan are considered disposable income in a Chapter 13 bankruptcy,” Thomas wrote.
The majority said a significant factor is the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, through which Congress “aimed to reverse a trend of consumers filing for Chapter 7 bankruptcy, which led consumers to liquidate their assets and resulted in small payments to creditors,” Thomas wrote, further noting that Saldana’s specific issue involves statutory language that has been “the subject of varied bankruptcy court interpretations.”
According to Thomas, the law “unambiguously excludes voluntary contributions from a debtor’s disposable income” when an employer withholds the sum from a paycheck as contribution to a retirement plan. He further said most bankruptcy courts have reached the same conclusion and noted the types of contributions the law protections generally have annual limits, a guardrail against debtors abusing the system.
In her dissent, Callahan said the statutory language, “which has been referred to as the ‘hanging paragraph,’ and which has spawned at least four different judicial interpretations,” contains ambiguity the majority did not discern.
“The majority’s focus on canons of statutory construction to unravel the ‘grammatical puzzle,’ leads it to adopt a result that is contrary to the general purpose of the underlying statute,” Callahan wrote. “A result for which there is really no evidence (other than the majority’s selective use of canons of statutory construction) that Congress intended.”
Callahan also said the statutory language was clear, specifically a reference to “voluntary retirement contributions,” which she said implied the debtor wasn’t obligated to go through with those paycheck diversions.
“The debtor could instead invest in the stock market, buy cryptocurrency, or play the lottery,” Callahan wrote. “Why should the debtor’s choice of placing some of the disposable income in one particular type of investment make it unavailable to the creditors? The majority does not really address the consequences of its determination as much as assert that canons of statutory construction support, indeed, compel this conclusion.”
Callahan further said the majority narrowly construed BAPCPA as providing its position without considering its many other alterations to bankruptcy law. Like Thomas, she traced through several earlier opinions but reached a differing conclusion.
“I agree with the vast majority of the judges who have had to construe the ‘hanging paragraph’ that it is indeed ambiguous,” Callahan wrote. “Having considered the four different interpretations offered by the courts over the last quarter century, I do not find that the application of canons of statutory construction offer a compelling interpretation of the statute.”
Saldana is represented by attorney Michael Primus, of Hercules, Calif.
Bronitsky is represented by attorneys from the Meyer Law Group, of San Francisco.
Christina Henry, of Seattle Consumer Justice PS, filed a brief, joined by the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys, in support of Saldana.
Henry Sommer, president of the National Consumer Bankruptcy Rights Center, said the decision represents a positive shift, at least for debtors in the Ninth Circuit, by moving away from what had been challenging circumstances under the 2012 U.S. Ninth Circuit decision in Parks v. Drummond, which held voluntary retirement contributions should be considered disposable income.
“It’s an important case because it recognizes that Congress wanted to prioritize retirement savings in bankruptcy," Sommer said in a statement.
“It makes Chapter 13 a more viable way for people to deal with their debts.”