Should bankrupt debtors be allowed to save money?

Should people be encouraged to start saving money after they have filed a bankruptcy case?

Sounds like a no-brainer right?

Unfortunately, Chapter 13 of the bankruptcy code does not just discourage saving, but may actually prohibit it.

At issue is one line in Chapter 13 that requires debtors who file under that chapter (usually homeowners struggling to save a house from foreclosure) to pay all of the their monthly “disposable income” in to their Chapter 13 plan. Disposable income is what’s left over after the basic household bills are paid — in other words, they money that could otherwise fund a modest savings account or mutual fund.

Since a Chapter 13 plan must last anywhere from three to five years under the law, that current law forbids debtors from saving money while they are paying on their plan.

This gets bankruptcy attorney Carmen Dellutri up on his high horse, going so far as to call Chapter 13 the “new debtor’s prison.”

I’m not sure I’d go that far — I’ve seen Chapter 13 bankruptcy cases be financial lifesaver for many Merrimack Valley families — but it might be time to consider re writing the law to permit people to start at least building little nest eggs while their bankruptcy case is in progress.

After all, encouraging and helping people to learn how to save for a rainy day beats having them file repetitive bankruptcy cases.

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