401K in a chapter13

[albacore44]

Hello,

i'm planning on filing in a few months. My attorney has told me I failed the means test, but qualify for chapter 13 a the smallest amount possible due to my expenses. Since i'm planning for this I know you are on a strict budget. I do have about 100K in my 401k. can I borrow, or take a hardship withdrawl during the 5 yr chapter 13, if an emergency arises ?? I am in southern california

[woeisme]

To take on new debt in a CH 13 for anything other than a medical emergency, you have to have permission from the trustee. Some trustees might allow such a 401K loan, others might not, it really varies, and I'm sure it would depend on the circumstance. The trustee would want to know how you would make payments on the loan if all your disposable income is supposed to be going to the plan payments, so you're going to have to be able to answer some tough budgeting questions as well. If it is a hardship withdraw, there will be tax penalties, how will you handle those, etc. Plan to start making the expense cuts you'd need to make to pay back the 401K loan or taxes now, set that amount aside every month, then you'll have the cash on hand to handle the emergencies. Good luck!

[Flamingo]

When you are in a CHapter 13, your entire financial house from the day you file to the day you are discharged is under the control of your Trustee. If more comes in your financial house than what was there at the time of filing, your Trustee wants to know and will need to be informed. Note that your 401(k) is exempt in filing; that does not mean you can borrow or withdraw from it during a Chapter 13. Unless an extreme emergency occurred during your CHapter 13, I would forget you have those funds during your Plan years because you are going to need them later on. Woeisme also gives you some excellent points. If you are intent on taking out those funds, you will probably need permission from the Trustee. Consult with your attorney at that time.

[albacore44]

Means test

I am very close to a 7 on the means test. my attorney told me I have to go 13. my concern is with keeping my house with it's 1st and 2nd adjustable mortgages and taxes, I would need to draw from my 401k to pay property taxes etc. a 13 will be real tight for me. Part of the problem is , I planned this poorly, and was trying to be honest and pay back some of this debt. so i took out a 401k loan of $45,000 at $800 a month, about 6 months ago, and paid off some of the creditors. Real stupid. now i can't count that loan in my means test formula.

[kornellred]

Yes you can, albacore. My 401K loan payments are part of my allowed expenses, and the payments came right off the top. That money is NOT disposable income in a Chapter 13 case. What I like best about 401K loans is that you are paying yourself back - with interest.
Of course, this is a situation which only proves to be advantageous in bankruptcy. Having to borrow from a 401K account is a definite sign of fiscal irresponsibility to begin with.

[albacore44]

Yes you can, albacore. My 401K loan payments are part of my allowed expenses, and the payments came right off the top. That money is NOT disposable income in a Chapter 13 case. What I like best about 401K loans is that you are paying yourself back - with interest.
Of course, this is a situation which only proves to be advantageous in bankruptcy. Having to borrow from a 401K account is a definite sign of fiscal irresponsibility to begin with.

How about for the purpose of the means test ?? can you deduct this as an expense from your gross income, since since it is a mandatory payback ??

[lrprn]

To take on new debt in a CH 13 for anything other than a medical emergency, you have to have permission from the trustee.

Actually in a Ch 13, by law you are not allowed to take on ANY new debt, for a medical reason or otherwise, without prior permission from your trustee. Doesn't mean it doesn't happen - just means you make yourself vulnerable if you take out the loan by borrowing from your 401K and then can't pay the loan back in full within the specified time without the considerable tax penalty (usually 10% of the amount removed from the 401K).

[lrprn]

How about for the purpose of the means test ?? can you deduct this as an expense from your gross income, since since it is a mandatory payback ??

This is a gray area of the current bk law. Some trustees allow you to include payback of 401K loans taken out before filing in your expenses, some do not. We were lucky - we got to include payback of the six loans my husband took out before we filed (although our lawyer had to file a brief and we had to go before the judge to make it so.) It delayed our confirmation for 15 months but we made case law that is helping other 13 filers in your situation - that made all the wait and frustration worth it!

Ask your lawyer how this situation is being handled by your trustee in your local bk court.

[albacore44]

This is a gray area of the current bk law. Some trustees allow you to include payback of 401K loans taken out before filing in your expenses, some do not. We were lucky - we got to include payback of the six loans my husband took out before we filed (although our lawyer had to file a brief and we had to go before the judge to make it so.) It delayed our confirmation for 15 months but we made case law that is helping other 13 filers in your situation - that made all the wait and frustration worth it!

Ask your lawyer how this situation is being handled by your trustee in your local bk court.

If that would be the case, then I would be able to qualify for a chapter7. My 401k loan payback, $800 a month would come off the top of my Gross income, thereby making me -$400-500 in monthly disposable income

[Scott50]

Albacore- I belive lrprn is referring to a Chapter 13- not a chapter 7- which is what your questioning.. I'm sure your attorney already took your 401K loans into consideration when they did the means test.. good luck!

[Scott50]

Yes you can, albacore. My 401K loan payments are part of my allowed expenses, and the payments came right off the top. That money is NOT disposable income in a Chapter 13 case. What I like best about 401K loans is that you are paying yourself back - with interest.
Of course, this is a situation which only proves to be advantageous in bankruptcy. Having to borrow from a 401K account is a definite sign of fiscal irresponsibility to begin with.

taking a 401K loan is never a good idea.. I know people say that you are paying yourself back with interest.. But they forget a thing called compound interest.. In the long run its the WORST thing you can do..

-If you default on your loan repayments, you will have to pay a 10% penalty fee (if you're 59.5 years or less) plus federal and provincial state income taxes.


- If you take out money from a 401k retirement account, you will lose all the compounding interest that you could have earned, therefore diminishing your future earnings.

- The prime rate you will be repaying might also be LOWER than the original interest rates you were receiving from your 401k retirement account. For example, if the prime rate is 7% and you were receiving 9% from a money market instrument, you will be losing a 2% interest rate thus diminishing your future earnings.

[albacore44]

taking a 401K loan is never a good idea.. I know people say that you are paying yourself back with interest.. But they forget a thing called compound interest.. In the long run its the WORST thing you can do..

-If you default on your loan repayments, you will have to pay a 10% penalty fee (if you're 59.5 years or less) plus federal and provincial state income taxes.


- If you take out money from a 401k retirement account, you will lose all the compounding interest that you could have earned, therefore diminishing your future earnings.

- The prime rate you will be repaying might also be LOWER than the original interest rates you were receiving from your 401k retirement account. For example, if the prime rate is 7% and you were receiving 9% from a money market instrument, you will be losing a 2% interest rate thus diminishing your future earnings.

I agree. hindsight. My problem was i did not take a good enough look at where I was headed. I used the $$ to pay off some unsecured debt, I was really trying to do the right thing. and now I have no possible way of paying it all. The only upside for me is I work for a major company 30 years.........but I did not budget well for the last few.

[kornellred]

Whatever you do (anyone thinking of filing Chapter 13)...do not borrow from your 401K prior to filing as a strategy to decrease your disposable income. I had been paying back my 401K loans for two years prior to filing ( a bit more than 400 dollars per month). I was surprised when my attorney informed me that Chapter 13 law allowed for the payback of 401K loans. I was afraid that I would have to declare the unpaid balances on the loans as distributions - then there would have been significant tax consequences.
The 400+ dollars per month that I pay back into the 401K now is my money. The trustee cannot take it.

Like Scott50 reminds us above - it is never a good idea to borrow from a 401K. But if, like me, you already have, and you find yourself filing for Chapter 13, it is a fortuitous circumstance.