401k loan to start us out?

[BKinOH]

Hello! My wife and I have been researching and preparing to file Chapter 13 for months. Our atty hasn't been very proactive and we recently had a question for him - and we really didn't get an answer... So, I'm hoping someone here might be able to help me out and/or provide some advice.

We just filed and our meeting with our creditors is set for mid-August. We literally have no savings left and once our payment plan begins, we will have essentially nothing left over.

My wife and I wanted to start living on a budget (envelope method) and thought we should also have a small amount of $ for emergencies. So I was considering taking out a $2,000 loan on my 401k to "seed" our envelopes - so we don't start "in the hole" on our budget and save the rest for an emergency.

1 - Is this a good idea? 2 - am I allowed to do this? 3 - Do I need to report this to the trustee (since its my own money, no tax implications, credit is not checked, etc.)?

The repayment amount per pay is only $20 per pay, which we can pay by going out to eat one time less per month.

Thanks for your help!

[bk2009]

Even if you're allowed, I wouldn't. Start fresh, with only the repayment amount. Live bare bones for awhile on groceries, etc and really save up the small emergency fund yourself.

[BKinOH]

Thanks for the reply! So that is something my wife and I have been going back and forth about... How do we do this? How do we start living on a buget i.e. the envelope method without having some $ to start it with?

[bk2009]

You start it cold turkey! The first few weeks might be pretty lean. Eat a lot of beans and rice to tide you over. Good news is with the internet, there are plenty of recipes for good, cheap eating. I have an awesome sausage and lentil soup that I make - good for at least two meals (plus usually another lunch) depending how much extra on hand I toss in. It's simple and yummy. Get creative, that's the easiest area that you can cut back on first. It's hard to live that way for a long time, but it's easy to do for a few months while you start to build up a savings.

Create yourself a budget - just because the tt says that you can spend $1000 a month on food and household items, does not mean that you need to. Don't buy anything that is not a *need*.

[Flamingo]

Answers to your questions as numbered

1. No, not a good idea for several reasons; the main one of which is because you will be in a Chapter 13. Forget you have a 401(k) and don't touch it. If you took out this loan and lost your job the following month, you would either have to pay it back in full or take it as a distribution which would involve penalities and income tax on the amount and would be additional income on your tax return for that year.

2. You will need to check with your attorney to see if you would be allowed to do that and would probably need trustee approval. You would be taking out $2,000 during your Chapter 13 that would be available to give to creditors out of money that is exempt from your BK. Not a good thing.

3. You need to discuss this with your attorney who you have retained. Something like this is an item that is not to be kept from your attorney.

There are many ways to cut corners during a Chapter 13 and save money. You can start with the $20 you planned to pay toward the loan and cut out other things to save additional money. We saved quite a bit by tossing our spare change at the end of each day in a large jar (and did not touch it). We bought Birthday, wedding and Christmas gifts each year from that fund. You'd be surprised how it adds up.

[BKinOH]

So, I think I understand what you are saying... Basically, don't spend any $ unless its completely necessary and use that money (that was budgeted for in the payment plan - the allowances) to fund our budget and emergency fund... Correct?

Sorry... We are flying kind of blind here. Thanks for the help.

[bk2009]

Yes, exactly. Only spend on true needs and buy as bare bones as you can for groceries to fund your emergency fund and budget. Good luck!

[BKinOH]

Again, thank you for your advice.

Flamingo - thank you for your detailed response. If I may ask, I noticed at the bottom of your post it says "Early Buy-Out: April 2006." What does that mean?

[walkthaplank]

I had planned on doing this, taking money in a 401k loan, buying new tires for the cars, pay lawyer and have a small emergency slush fund. The lawyer I ended up retaining said that it was not only a very bad idea, I'd end up with a trustee that was going to fight me on everything (including trying to have that expense disallowed) because of it.

Learn to find a way to pad your planned/allowed expenses so you have room to breathe, less DMI into plan and more into your emergency fund. Just because it is an allowed amount/expendature does not mean you need to pay that much. That is hopefully what your lawyer is doing for you.

[Flamingo]

Again, thank you for your advice.

Flamingo - thank you for your detailed response. If I may ask, I noticed at the bottom of your post it says "Early Buy-Out: April 2006." What does that mean?

We filed under the "old law" (pre-October 2005). Under that old law you could buy out early out of your Chapter 13 plan if you were able and had trustee approval to do so (i.e., refinance your house and use equity to pay off plan). After three years into the plan you could buy out at the percentage of your Chapter 13 Plan (i.e. your percentage payback). We did so due to major house repairs that would not make it to the end of our five year plan so we requested to refinance (we had a ton of equity), got the money to make the house repairs and new roof and paid off our plan - and we still ended up having 50% equity left in our house after that. There are still some folks in Chapter 13 who filed prior to 10/05 that could be in a buy out position so I still list that in my signature. However, under the new law, it appears you can only buy out of a Chapter 13 at 100% and not at the confirmed percentage. Hope that explains it a bit to you.

[BKinOH]

Thank you all very much for your help and guidance! Its kind of scary...but I know we can do it.

I do have another question based on the responses. What do you do for a major expense that comes up? Like a car repair - something that might cost $200 to $300, like breaks for your car?

[StartingOver08]

That is why you want to start your emergency fund right away. In the beginning you will want to put every $$ into the fund you can - you may even want to sell some of your exempted items on Craigslist to get started.

A savings is crucial if you are in Ch 13 or a Ch 7. If you go thru your budget you will find extras all over the place. Example, my electric bill is half what it used to be because I keep the a/c at 78 or above or OFF for most of the time. That is no small feat, I'm in S Florida! This alone saves me $100 to $150/mth. No more fast food, this saves a good $20/wk. I don't eat out at all. The food budget is one place you can really save. There are lots of places to save when you actually take a look. You can do the same. In no time at all you will have a $300 to $500 savings for a cushion.