A debtor's Chapter 13 bankruptcy plan must provide for the payment of all her "projected disposable income" to her unsecured creditors (11 U.S.C. § 1325(b)(1)(B)). Bankruptcy Code Section 1325(b)(2) (11 U.S.C. § 1325(b)(2)) defines disposable income as the debtor's "current monthly income ... less amounts reasonably necessary to be expended ... for the maintenance or support of the debtor." Although "projected disposable income" is not defined in the Bankruptcy Code, following the Supreme Court's decision in Hamilton v. Lanning (560 U.S. 505, 524 (2010)), it is determined by taking the debtor's current disposable income under Bankruptcy Code Section 1325(b)(2), adjusted in certain circumstances for changes "known or virtually certain" to occur during the commitment period. When a debtor expects no changes in financial circumstances, her projected disposable income under Section 1325(b)(1) is simply her disposable income under Section 1235(b)(2).

According to the Sixth Circuit, before 2005, the "overwhelming consensus" among bankruptcy courts was that wages voluntarily withheld as 401(k) plan contributions were part of a debtor's disposable income. However, Section 541(b)(7)(A) of the BAPCPA (11 U.S.C. § 541(b)(7)(A)) provides that "property of the estate does not include … any amount … withheld by an employer from the wages of employees for payment as contributions to … a 401(k) retirement plan … except that such amount under this subparagraph shall not constitute disposable income as defined in section 1325(b)(2)" (emphasis added; the emphasized text is referred to as the "hanging paragraph").

Since the enactment of the BAPCPA, federal courts have applied four interpretations of Bankruptcy Code Section 541(b)(7)(A):

The Sixth Circuit applied this legal framework to the question of whether the exclusion in the hanging paragraph in Section 541(b)(7)(A) encompasses the continued monthly 401(k) plan contributions that the debtor sought to exclude from her disposable income in her proposed bankruptcy plan. Applying several canons of statutory construction to the statute, the Sixth Circuit held that the hanging paragraph excludes from disposable income in the debtor's post-bankruptcy petition her 401(k) plan contributions in the dollar amount that the debtor's employer withheld from her wages before her bankruptcy.

According to the Sixth Circuit, its interpretation is entirely consistent with the pre-petition focus of Section 541 of the BAPCPA, and the hanging paragraph's express reference to Section 1325(b)(2) (the definition of disposable income) indicates that Congress intended to allow a debtor to exclude from her disposable income the 401(k) plan contribution amount withheld from her monthly wages before bankruptcy.

The Sixth Circuit described its holding as a narrow one, and it did not choose between the Seafort BAP and CMI interpretations of Section 541(b)(7)(A) because it concluded that the result would be the same in this case, since the debtor's employer withheld from the debtor's wages $220.66 in 401(k) plan contributions each month for at least six months before her bankruptcy. Rather, the Sixth Circuit held only that a debtor in like circumstances as the debtor in this case may deduct her monthly 401(k) plan contributions from her disposable income under Section 1325(b)(2).

Under the good faith analysis required by Bankruptcy Code Section 1325(a)(3), a bankruptcy court may not confirm a Chapter 13 plan unless the debtor proposed it in good faith. The Sixth Circuit wrote that its interpretation of Section 541(b)(7)(A) in this case may require a deeper good faith analysis to minimize the risk that a debtor considering bankruptcy might begin making 401(k) plan contributions before filing for bankruptcy to lower the amount she must repay her creditors.

The dissenting judge would have applied the holding from the Sixth Circuit's decision in Seafort v. Burden, to hold that the debtor in this case cannot exclude 401(k) plan contributions from post-petition disposable income, even if the debtor began making contributions before filing for bankruptcy.