Some Kentucky residents might be familiar with Chapter 13 of the U.S. Bankruptcy Code. Under this provision, consumers who have a reliable source of income are able to restructure certain debts pursuant to a repayment plan that lasts either three or five years. Most of the debtor's disposable income is supposed to go towards paying down the obligations, and the plan has to be approved by a judge. In March, the U.S. Bankruptcy Court for the Western District of Louisiana issued a ruling on how retirement assets can affect the repayment plan.

In the case, a married couple had filed a proposed plan in March 2016. The plan provided for payments on a loan that the husband had taken out from his 401(k) retirement account. It also provided for contributions to that account. In the aggregate, those payments constituted slightly less than 20 percent of the couple's gross income.

Neither the Chapter 13 trustee nor any of the couple's creditors objected to the plan. However, the court refused to accept it. It found that the amount allocated towards the retirement account was excessive. While it noted that saving for retirement is exemplary, it also said that debtors who have the wherewithal to repay their creditors should do so. It concluded that, in this case, 3 percent of their gross income would be acceptable, although it did not make that a benchmark for future cases.

This case shows that a Chapter 13 repayment plan has to be acceptable to all parties and not just creditors. Consumers who are considering filing under this chapter may thus want to have the assistance of counsel when preparing a plan.