Ralph Goff McCullers

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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
RALPH GOFF MCCULLERS, II,
Debtor.
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Case No. 10-34281
Chapter 13
MEMORANDUM DECISION REGARDING TRUSTEE’S
OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN
The principal issue raised in this case is whether section
541(b)(7) 1 authorizes a chapter 13 debtor to deduct voluntary
postpetition contributions to a qualified benefit plan in
calculating the debtor’s disposable income under section 1325(b).
I conclude that section 541(b)(7) does not authorize such a
deduction.
FACTS
Debtor is a 43-year-old single man with no dependents, who
earns $9,806 per month. 	As of the petition date he owed $23,571 on
a car loan, $27,000 to his ex-wife, $71,461 to general unsecured
1 All statutory references are to the United States Bankruptcy
Code, Title 11 of the United States Code.
MEMORANDUM DECISION REGARDING
TRUSTEE’S OBJECTION TO
CONFIRMATION OF CHAPTER 13 PLAN 	-1-
Signed and Filed: June 08, 2011
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
June 09, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 10-34281 Doc# 52 Filed: 06/08/11 Entered: 06/09/11 12:15:53 Page 1 of
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creditors, and $23,780 to his own 401(k) retirement plan.
Debtor proposed a chapter 13 plan under which he would pay
$200 per month for 60 months. 	General unsecured creditors would
receive total payments of $7,900, which represents approximately 11
percent of their claims. 	Debtor would pay the priority support
claim of his ex-wife and repay the loan from his 401(k) retirement
plan in full outside of the plan.
The chapter 13 trustee objected to confirmation of the plan,
contending that the plan did not pay to unsecured creditors all of
Debtor’s “projected disposable income,” as required under section
1325(b).
Whether Debtor’s plan provides for the payment of all of his
projected disposable income turns upon whether Debtor is entitled
to deduct voluntary contributions to his 401(k) plan, and amounts
necessary to repay money he borrowed from that plan.
In calculating his disposable income on Official Form B22C,
Debtor claimed a deduction of $1,921 per month for payments to his
401(k) plan. 	This amount includes both ongoing contributions to
the plan and repayment of the loan Debtor obtained from his plan,
but does not specify how much represents new contributions and how
much represents repayment of the loan. 	In the last pay period
before the petition date, Debtor made a new contribution of $1,768
and a loan payment of $721. 	Debtor acknowledges that his employer
does not require him to make any contributions to his 401(k) plan
and that all proposed contributions to that plan are voluntary.
Trustee contends that as a matter of law Debtor is not
entitled to deduct any voluntary retirement contributions in
calculating his disposable income. 	Trustee acknowledges that under
MEMORANDUM DECISION REGARDING
TRUSTEE’S OBJECTION TO
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section 1322(f) Debtor is entitled to deduct payments necessary to
repay the loan from his 401(k) plan, but contends that the loan
will be repaid after 32 months, and that plan payments should be
increased once the loan is repaid.
Debtor contends that, under section 541(b)(7), he is entitled
to deduct contributions in the maximum amount permissible under a
401(k) plan, and that the total amount deducted over the life of
the plan does not exceed the deductions authorized under section
1322(f) and section 541(b)(7). 	Debtor further contends that his
ongoing contributions are reasonable and necessary to provide for
his retirement in light of his age and existing retirement savings.2
DISCUSSION
A. 	Repayment of Money Borrowed from Retirement Plan
Trustee acknowledges that section 1322(f) permits Debtor to
deduct the amount necessary to repay money Debtor borrowed from his
retirement plan in calculating his disposable income. 3 	Trustee
complains that Debtor’s plan does not provide for payments to
increase after Debtor has repaid the loan, which Trustee contends
will occur 32 months into the 60-month plan. 4
2 Debtor is 43 years old. 	He had approximately $88,000 in his
401(k) plan as of the petition date, and has no other retirement
savings. 	Debtor contends that his planned postpetition
contributions are reasonable and necessary, because he must make
contributions at that rate to be able to retire at age 67 and
replace 75 percent of his current income from social security
benefits and his retirement savings. 	For the reasons set forth
below, I do not determine whether Debtor’s contemplated
contributions are reasonable and necessary.
3 Section 1322(f) provides: “A plan may not materially alter
the terms of a loan described in section 362(b)(19) and any amounts
required to repay such loan shall not constitute ‘disposable
income’ under section 1325.”
4 Trustee’s assertion that the loan would be repaid in 32
months appears to be based on the assumption that the loan was
$23,780 as of the petition date, and that Debtor would repay the
MEMORANDUM DECISION REGARDING
TRUSTEE’S OBJECTION TO
CONFIRMATION OF CHAPTER 13 PLAN 	-3-	Case: 10-34281 Doc# 52 Filed: 06/08/11 Entered: 06/09/11 12:15:53 Page 3 of
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The calculation of a debtor’s projected disposable income must
take into account any changes in the debtor’s financial
circumstances that are reasonably certain to occur during the term
of the plan. 	Ransom v. FIA Card Servs., N.A., 131 S.Ct. 716, 725
(2011); Hamilton v. Lanning, 130 S.Ct. 2464, 2478 (2010). 	Thus, at
such time that a retirement loan is fully repaid, the postpetition
income previously used to repay that loan must then be used to pay
creditors. 	In re Lasowski, 575 F.3d 815, 820 (8th Cir. 2009);
Burden v. Seafort (In re Seafort), 437 B.R. 204, 211 (6th Cir. BAP
2010).
It appears that Debtor’s loan from his 401(k) plan will be
fully repaid 32 months into the 60-month plan. 	At that time, the
income previously used to repay that loan becomes disposable income
that must be used to repay creditors. 5 	Debtor’s current plan does
not provide for such an adjustment.
B. 	Voluntary Retirement Contributions
Trustee’s second objection to confirmation raises a more
difficult question, whether subsection 541(b)(7) authorizes Debtor
to deduct voluntary postpetition contributions to his 401(k)
retirement plan in determining the disposable income he must devote
to payment of his creditors.
1. 	The Statutory Framework
Section 541(b)(7) provides the only means by which an above-
median-income chapter 13 debtor can make voluntary postpetition
contributions to a qualified retirement plan over the objection of
loan at the rate of $721 per month, the amount he repaid in the
last month prior to the petition date.
5 If the loan were repaid without interest and in equal
monthly payments over the full 60 months of the plan, the monthly
payments would be only $396.33 per month.
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TRUSTEE’S OBJECTION TO
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a creditor or the trustee. 	Under section 1325(b)(1), a chapter 13
plan can be confirmed over the objection of the trustee or an
unsecured creditor only if the debtor contributes all “projected
disposable income” to the plan. 	The calculation of “projected
disposable income” begins with the calculation of “disposable
income,” which is defined as current monthly income less necessary
expenses. 	§ 1325(b)(2). 	For an above-median-income debtor,
necessary expenses are limited to those recognized in IRS debt-
collection guidelines. 	§§ 707(b)(2) and 1325(b)(3). 	Under the IRS
guidelines, mandatory retirement contributions are deductible, but
voluntary contributions are not. 6 	Egebjerg v. Anderson (In re
Egebjerg), 574 F.3d 1045, 1051-52 (9th Cir. 2009); In re Prigge,
441 B.R. 667, 676-77 (Bankr. D. Mont. 2010). 	Debtor does not
contend that any of the contributions he seeks to deduct are
required by his employer. 	Thus, the question presented is whether
the very specific provisions of subsection 541(b)(7), discussed
below, override the more general provisions of subsections
707(b)(2) and 1322(b) just described.
Section 541(b)(7)(A) states that property of the estate does
not include any amount
withheld by an employer from the wages of employees for
payment as contributions
[to three different forms of retirement savings plans
that qualify for tax deferment under the Internal Revenue
Code of 1986]
except that such amount under this paragraph shall not
constitute disposable income as defined in section 1325(b)(2).
(emphasis added).
6 Postpetition retirement contributions of below-median-income
debtors are not governed by section 707(b) and the IRS guidelines,
and are instead governed by more general principles of necessity
and reasonableness. 	§ 1325(b)(2),(3).
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TRUSTEE’S OBJECTION TO
CONFIRMATION OF CHAPTER 13 PLAN 	-5-
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The reported decisions on section 541(b)(7) are split among
three highly divergent interpretations: (1) that the debtor may
continue to contribute at the rate he or she contributed
prepetition; (2) that the debtor may contribute the maximum amount
permitted under the statute governing the type of plan at issue;
and (3) that section 541(b)(7) does not authorize postpetition
contributions in any amount.
2. 	The Seafort Decision
The highest court to address the issue held that section
541(b)(7) excludes from disposable income postpetition
contributions up to the amount of the debtor’s prepetition
contributions. 	Burden v. Seafort (In re Seafort), 437 B.R. 204
(6th Cir. BAP 2010). 	Seafort was followed in the only reported
bankruptcy court decision to address the question since Seafort was
decided. 	In re Noll, 2010 WL 5336916 (Bankr. E.D. Wis. 2010). 	The
Seafort court cites three reasons in support of its decision.
First, Seafort concludes that the contributions excluded from
property of the estate under section 541(b)(7) are prepetition
contributions.
Property of the estate under § 541(a)(1) and exclusions
from property of the estate under § 541(b) must both be
determined on the date of the filing of the case. 	As
provided in the statute, § 541(a) specifically states
that “the commencement of a case . . . 	creates an
estate.” 	Section 541(b) excludes certain property from
the definition of “property of the estate.” 	Read
together, § 541(a) and (b) establish a fixed point in
time at which parties and the bankruptcy court can
evaluate what assets are included or excluded from
property of the estate. 	Section 541(a) clearly
establishes this point as the commencement of the case.
Therefore, only 401(k) contributions which are being made
at the commencement of the case are excluded from
property of the estate under § 541(b)(7).
Id. at 209 (quotations and ellipses in original). 	That section
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TRUSTEE’S OBJECTION TO
CONFIRMATION OF CHAPTER 13 PLAN 	-6-
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541(b)(7) excludes only prepetition contributions from property of
the estate is crucial to the issue at hand, because the plain
language of section 541(b)(7) excludes from disposable income only
“such amount” excluded from property of the estate.
Next, Seafort notes that section 1306, which addresses
property acquired after the petition date in a chapter 13 case,
does not exclude postpetition retirement contributions either from
property of the estate or from disposable income.
Rather, 401(k) contributions are only excluded in § 541
which specifically applies to property in existence at
the commencement of the case. 	Because Congress
identified 401(k) contributions as excluded in § 541, but
not in § 1306, the Panel concludes that the absence of
any reference in § 1306 to 401(k) contributions was
intentional.
Id. at 209.
Finally, Seafort determines that limiting retirement
contributions permissible under a chapter 13 plan to the amount
debtor contributed prepetition is consistent with legislative
intent.
In regard to retirement savings, Congress clearly
intended to strike a balance between protecting debtors’
ability to save for their retirement and requiring that
debtors pay their creditors the maximum amount they can
afford to pay. 	This balance is best achieved by
permitting debtors who are making contributions to a
Qualified Plan at the time their case is filed to
continue making contributions, while requiring debtors
who are not making contributions at the time a case is
filed to commit postpetition income which becomes
available to the repayment of creditors rather than their
own retirement plan.
Id. at 210.
3. 	The Johnson Decisions
Several bankruptcy courts have held that section 541(b)(7)
authorizes a chapter 13 debtor to make voluntary postpetition
MEMORANDUM DECISION REGARDING
TRUSTEE’S OBJECTION TO
CONFIRMATION OF CHAPTER 13 PLAN 	-7-
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contributions to a qualified retirement plan up to the maximum
amount permitted under the non-bankruptcy law governing the type of
plan in question. 	In re Gibson, 2009 WL 2868445 at *2-3 (Bankr. D.
Idaho 2009); In re Mati, 390 B.R. 11, 15-17 (Bankr. D. Mass. 2008)
In re Devilliers, 358 B.R. 849, 864-65 (Bankr. E.D. La. 2007); In
re Leahy, 370 B.R. 620, 623-24 (Bankr. D. Vt. 2007); In re Shelton,
370 B.R. 861, 865-66 (Bankr. N.D. Ga. 2007); In re Nowlin, 366 B.R.
670, 676 (Bankr. S.D. Tex. 2007); In re Njuguna, 357 B.R. 689, 690
(Bankr. D.N.H. 2006); In re Johnson, 346 B.R. 256, 263 (Bankr. S.D.
Ga. 2006). 	I will refer to these cases as the Johnson decisions,
after the name of the first decision to adopt this analysis.
The Johnson decisions focus only on the language stating that
the contributions specified “under this subparagraph [i.e.
541(b)(7)] shall not constitute disposable income as defined in
section 1325(b)(2).” 	These decisions, all issued before Seafort,
do not address the interpretive puzzle addressed in Seafort: that
the amount excluded from disposable income under 	section 541(b)(7)
is plainly linked to the debtor’s postpetition contributions.
4. 	The Prigge Decision
Finally, one bankruptcy court held that section 541(b)(7) does
not authorize a chapter 13 debtor to make voluntary postpetition
retirement contributions in any amount. 	In re Prigge, 441 B.R.
667, 676-78 (Bankr. D. Mont. 2010); cf. In re Braulick, 360 B.R.
327, 330-31 (Bankr. D. Mont. 2006) (similarly interpreting
§ 541(b)(7) regarding a deferred compensation plan).
Prigge noted that in enacting section 1322(f), Congress
expressly excluded from disposable income all amounts necessary to
repay a loan from the debtor’s retirement plan, and placed that
MEMORANDUM DECISION REGARDING
TRUSTEE’S OBJECTION TO
CONFIRMATION OF CHAPTER 13 PLAN 	-8-
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exclusion within the confines of chapter 13 itself. 	Prigge noted
that Congress did not adopt a similarly broad and unambiguous
exclusion for postpetition contributions to a retirement plan. 	The
court concluded from this pattern that Congress did not intend to
create any exclusion for postpetition retirement contributions, and
that the function of section 541(b)(7) was merely to clarify that
retirement contributions withheld prepetition and still in the
possession of the employer on the petition date are neither
property of the estate nor postpetition income to the debtor. 	Id.
at 677 n.5.
5. 	Which Precedent is Most Persuasive?
This court is not persuaded by the Johnson decisions, which
hold that section 541(b)(7) excludes from disposable income all
postpetition retirement contributions permissible under the type of
retirement plan in question. 	Those decisions are not persuasive,
because a close reading of section 541(b)(7) indicates that “such
amount” excluded from disposable income refers to prepetition
contributions. 	With minor exceptions not relevant here, section
541(a) defines as property of the estate only property that the
debtor holds on the petition date: section 541(a)(1) provides that
property of the estate includes the “legal or equitable interest of
the debtor in property as of the commencement of the case”
(emphasis added), and section 541(a)(6) states that section 541
does not bring into the estate “earnings from services performed by
an individual debtor after the commencement of the case.” 7 	Section
7 In a chapter 13 case, postpetition personal service income
becomes property of the estate under section 1306(a)(2), not under
section 541.
MEMORANDUM DECISION REGARDING
TRUSTEE’S OBJECTION TO
CONFIRMATION OF CHAPTER 13 PLAN 	-9-
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541(b) creates exceptions to section 541(a). 	This structure
suggests that section 541(b)(7) excludes from property of the
estate only property that would otherwise be included in the estate
under section 541(a). 	Thus, the most natural reading of section
541(b)(7) is that it excludes from property of the estate only
those contributions made before the petition date. 	That Congress
intended to exclude from disposable income only the same
prepetition contributions excluded from property of the estate is
indicated by its specifying the contributions excluded from
property of the estate and then stating that “such amount” shall
not constitute disposable income.
The Johnson decisions also fail to explain why Congress, if it
intended to enact a categorical exclusion from disposable income
for retirement contributions, did not use language similar to that
of section 1322(f), which created a categorical exclusion for all
postpetition retirement loan repayments, but instead adopted a
provision that links the amount of the exclusion for retirement
contributions to prepetition contributions.
Seafort and Prigge are more persuasive than the Johnson
decisions, because they both limit the amount excluded from
disposable income to prepetition contributions. 	Seafort holds that
the debtor is entitled to make postpetition retirement
contributions at the rate that the debtor made such contributions
prepetition. 	Seafort, 437 B.R. at 209-10. 	Prigge holds that the
exclusion is limited to the amount that has been withheld by the
employer but not yet transferred to the plan as of the petition
date. 	Prigge, 441 B.R. at 677 n.5.
At first glance, Seafort is more persuasive, because it adopts
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an attractive and plausible policy: that Congress intended to
encourage chapter 13 debtors to continue making retirement
contributions, but did not intend to permit debtors to increase
their rate of contribution to the detriment of their creditors.
Seafort, 437 B.R. at 210.
However appealing the result achieved in Seafort, close
analysis of the language of the statute suggests that Congress
actually intended the much more limited effect recognized in
Prigge. 	First, neither the statute itself nor the Seafort decision
offers any mechanism by which the fixed amount withheld as of the
petition date is converted into a monthly rate of contribution that
the debtor may continue postpetition. 	Second, and more important,
Seafort does not take into account the use of the words “except
that” at the beginning of the statutory language excluding
retirement contributions from disposable income. 	Section 541(b)(7)
provides that certain contributions to qualified plans are excluded
from property of the estate, and concludes with the language at
issue here: “except that such amount under this paragraph shall not
constitute disposable income . . . ” (emphasis added). 	Use of the
term “except that” suggests that the purpose of the language is
merely to counteract any suggestion that the exclusion of such
contributions from property of the estate constitutes postpetition
income to the debtor. 	If Congress had intended to exclude
prepetition contributions from the calculation of disposable income
more generally, it would have been much more natural for Congress
to provide that such contributions are excluded from property of
the estate “and” in the calculation of disposable income. 	Prigge’s
more limited interpretation is reinforced by the fact that Congress
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used much more direct language in excluding retirement loan
repayments from disposable income. 	Section 1322(f) was placed
within the confines of chapter 13 itself, and states explicitly
“any amounts required to repay such loan shall not constitute
‘disposable income’ under section 1325.”
Congress’s use of the words “except that” is entirely
consistent with the Prigge decision, which held that the purpose of
the statute was merely to clarify that the exclusion of certain
prepetition contributions from property of the estate did not give
rise to disposable income to the debtor. 	Prigge, 441 B.R. at 677
n.5. 	This court is mindful of its obligation to adopt an
interpretation that accords some effect to the statutory language
in question, and that Prigge gives that language a very limited
effect, because it is unlikely even without the language in
question that excluding sums earned by the debtor prepetition from
property of the estate would ever be construed as creating
postpetition disposable income to debtor. 	Prigge’s limited reading
is entirely appropriate, however, because the statutory language
itself discloses very modest aims. 	In using the words “except
that,” Congress suggests that its only purpose was to negate any
inference that the exclusion of such contributions from property of
the estate gives rise to income to the debtor.
CONCLUSION
Trustee’s objection to confirmation of Debtor’s chapter 13
plan is sustained. 	In calculating disposable income, Debtor may
deduct loan repayments to his 401(k) retirement plan only until
that loan is repaid. 	So long as Trustee or an unsecured creditor
objects, this above-median-income Debtor may not make voluntary
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postpetition contributions to his retirement plan. 8 	Debtor promptly
shall file an amended chapter 13 plan.
**END OF MEMORANDUM DECISION**
8 As explained more fully in part B.1., above, there are
circumstances in which a chapter 13 debtor can make postpetition
contributions to a qualified benefit plan. 	First, the court need
not determine disposable income or projected disposable income
unless the trustee or an unsecured creditor objects to confirmation
of the plan. § 1325. 	Thus, it is the trustee and unsecured
creditors who determine the reasonableness of voluntary retirement
contributions of an above-median-income debtor. 	Second,
contributions required by an employer can be deducted in
determining disposable income under the IRS guidelines incorporated
into section 707(b). Egebjerg, 574 F.3d at 1051-52. 	Third, the
expenses that may be claimed by a below-median-income debtor are
not limited to those specified in section 707(b) and the IRS
guidelines, and such a debtor may be able to establish that
voluntary contributions are reasonable and necessary expenses. 	In
the present decision, the court decides only that section 541(b)(7)
does not alter these general rules, but was enacted for the very
limited purpose described in Prigge.
MEMORANDUM DECISION REGARDING
TRUSTEE’S OBJECTION TO
CONFIRMATION OF CHAPTER 13 PLAN 	-13-
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