401K loans

[jenbes27]

What happens to 401k loans in ch13? The attorney I talked to said they continue to take the payments out of the check. However we have three loans that total almost $800 per month. If I read through all the documents, your secured and priority debts get averaged and paid over 60 months. I am asking because if they are averaged, then the payments get lowered to $325 per month over 60 months. Does anyone have any experience with this?

[aa06a47]

What happens to 401k loans in ch13? The attorney I talked to said they continue to take the payments out of the check. However we have three loans that total almost $800 per month. If I read through all the documents, your secured and priority debts get averaged and paid over 60 months. I am asking because if they are averaged, then the payments get lowered to $325 per month over 60 months. Does anyone have any experience with this?

401k loans are an allowed deduction under the new law. So, in essence, you get to pay yourself back the 800/month and the creditors don't get that money.... Usually, you may have to increase payments once the loan is payed off as you have more disposible income. I wouldn't offer it up, just show it as an expense and if the trustee catches it, he may want a plan that increases after your loan is payed off.

[HHM]

As far as I know, you cannot INCLUDE 401K loans in your chapter 13, so you will have to continue making those payments, all $800 per month outside the chapter 13 plan. But from what other people posted, you are allowed to factor in that payment to your 401K as an expense, thereby reducing what you would otherwise have to pay your creditors, (assuming the loans were for allowable purposes and were taken out in good faith).

[lrprn]

My husband took out six early withdrawal 'loans' from his retirement fund trying to keep us afloat - the last about 15 months before we filed Ch 13. Our lawyer listed the monthly payments for these six loans as a part of our expenses. After we filed, our trustee objected to the payments we were making on the six retirement loans while we continued to contribute to our current retirement accounts, calling it "double-dipping". In our bk district the maximum a couple can contribute to retirement while in Ch 13 is 10% of gross income, and paying the loans back plus contributing to our retirement put us at 11.75%.

During our pre-court hearing last October with our district bankruptcy judge, our trustee, and our lawyer, the judge said that although it did look like "double-dipping" on our retirement, given our ages (61 and 55) and that there is no indication of bad faith or fraud in our filing, double-dipping could be "acceptable". This was not an official ruling and our trustee has not withdrawn his objection, but given what the judge said, our lawyer feels that if we do go to court, the judge is likely to rule in our favor. For now, we just keep paying back the six retirement loans every month, continuing to contribute to both our retirements as well, and hanging out waiting to see if our trustee will continue forward with his "double-dipping" objection to force our judge to make an official ruling.

Usually everyone here in the forum is anxious for the court or their trustee quit wasting time and make a decision as quickly as possible....but in our case, the court and our trustee can take all the time they want! LOL!

[wayne-o]

I filed 13 under the old law and my 401k loan was not allowed. They would send a stay to and my payroll deduction would stop, then the next week it would start again. My 401k is through Merrill Lynch and they said that the bankruptcy court could not order them to stop as the funds were exempt.

I could tell them that I was defaulting on the loan and they would stop, but my future participation could be in jeopardy.

My attorney advised that since I only had approx 12 payments left to just suck it up and try to pay as to preserve my retirement. I took his advise and am glad I did.

[treehugger1]

All attorneys I've spoken with stated that 401(k), 403(b), and 457 loans against any defered income can be listed as an expense and would take away from disposable income available for a plan. I do find it interesting that some folks are still allowed to contribute a easonable percent into retirement accounts, but this really is an "expense." I have a pension plan, but also contribute 3% of salary into an optional plan. One atorney stated to keep making that contribution and not cross the bridge until necessary. This must be a bit of a "shaded" area in the new law.

[HHM]

I need to clarify what I said, when I say you are not allowed to include the 401K loans in your chapter 13, I should have said, you are not allowed to include your 401K loan payments in the chapter 13 plan payment.

I gather from your post that you may be intending to pay the 401K loans THROUGH the chapter 13...as far as I know, that is not allowed because 401k loans are not debts under the BK code. You can include the 401K payments as an expense item in your budget (thereby helping to reduce what you pay to the trustee in your chapter 13 plan), but you will have to continue to make your 401K loan payments (in the full amount) as you are doing now.

[jenbes27]

Thanks!

Thats exactly what i was wondering. Thanks for the answers.

[treehugger1]

And, you definitely want to keep paying them. The last thing you need after filing is to pick up a tax debt.

[aa06a47]

And, you definitely want to keep paying them. The last thing you need after filing is to pick up a tax debt.

Not only that, if you quit paying them, then the trustee can get that money in the payment plan. While this sounds a bit "selfish", I would rather pay myself than the unsecured creditors.