401K Question ???

[DebtHeadache]

I will be filing for bankrupcy in February (March at the latest)....I have a question regarding 401K Loans.

We took 2 401K Loans out to help reduce our debt about a year or so ago and we are paying it back thru my paychecks.

1) Will the trustee have a big problem with these?

2) Can they make me disolve my 401k and take a big tax hit on my income taxes?

As always your input is appreciated.

[kornellred]

My attorney told me that (at least in Chapter 13) 401K loan payments are considered to be an exemption in figuring disposable income. In other words - you keep paying down your 401K loans. They are coming out of your paycheck before you even see the money anyway, so you don't miss it.

Don't know about Chapter 7. Maybe there is a way to legally change the status of a 401K loan into a distribution - in which case you would have to pay taxes on the remaining balance and also the 10 percent penalty tax if you are under age 59 and 1/2. There does not appear to be any advantage to such an action for either the debtor or the creditors (or the trustee either).

WR

[DebtHeadache]

Thanks for replying. That is sure good news.

[lrprn]

For the Means Test, the repayments of your 401k loan should be added to your expenses. However, for Ch 7 this is not entirely set in stone and could be challenged by your trustee. It's a gray area under the current bankruptcy law.

Your 401K itself is fully protected by the current bk law, but some trustees challenge repayment of personal 401K loans by saying that you are repaying yourself rather than repaying true creditors.

Make appointments with 3-4 experienced bk attorneys in your area for free or low-cost initial consultations. You'll find out if your 401K loan payments might be impacted by your local court's culture and practices.