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    401k

    Can we use the money in our 401K to pay off our chapter 13? I realize we will incur penalties from the IRS. We are just about finished with our first year and our payments are going up substantially. Can anyone tell me if this is allowed by the trustee? Thanx much.

    #2
    Don't do it. I'm sure someone will come along with more eloquent reasons why you shouldn't, but in addition to the nasty penalties you will get from the irs you will have spent your retirement fund on something that will be done in 4 more years. Why is your payment going up? Also, are you in a 100 percent payback? If not it won't work anyways.

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      #3
      Why won't it work? We will not be using all of our 401K money, just some of it. Our payment is going up because that is how the plan was written. Also, if my hubby gets more bonuses or I get a job, the trustee will take the money anyway. We are not paying 100%. So again, why can't we do it? Is there some rule about paying off early?

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        #4
        Ohhh I really hope someone else jumps in here because I am new to this. The way I understand the chapter 13 process is that if you are not paying back 100 percent then you are required to complete the term of your payment plan. If you do not complete the term (or pay all creditors 100 percent) then your plan is not discharged and you are back to square one.

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          #5
          For one thing, the amount you withdraw will count as income. Higher income - higher payment, higher percentage of payback. That's why it has to be 100% to make it work.
          The pros will be along eventually and will tell you not to do it.

          Keep On Smilin'

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            #6
            You can't pay off early unless you are 100%. You used to after 36 months just pay your confirmed % back, but not after the new laws were passed. We tried to see if we could do it when we hit the 36 month mark and were given the big NO by our attorney. I haven't heard of anyone paying less than 100% to get out early after the new law. It would be nice.
            Chapter 13 Filed: 2/7/07 Confirmed: 5/1/07 Discharged: 3/2/2012 Closed: 6/2/2012
            130 out of 130 bi-weekly payments DONE
            100% Completed

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              #7
              I guess they figure if you have the extra money to pay it off, then you should have the extra to pay more.

              Keep On Smilin'

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                #8
                The only way to bring a Chapter 13 to conclusion prior to the stipulated payment duration is to pay the entire amount owed to your creditors - period.

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                  #9
                  Kingxray..I just wanted to say that I really hope everything works out for you. I am only 1 payment in ..awaiting confirmation..and don't know how we will make it the next 48 months (i bet that gets changed to 60 ). It is hard to live within our means in this society. We are going to give it our best shot though. I really was wondering why your payment is going up. Did something change for you financially? Or did you have a bill that got paid off? Can your plan be amended in any way?

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                    #10
                    Regardless of the desire to get out of the Chapter 13 early, which you can't do unless you are at a 100% payback, it is a bad idea to take money out of your retirement plan. Generally, most plans will not allow in service distributions, (that is while you are still employed). Usually the only way to access 401 (k) funds while still employed is through a loan that would have to be paid back over a period no longer than 60 months. If you leave the employer before paying off the loan, you would have to restore the entire balance or be taxed on the remaining unpaid balance. Not a good result if you are suddenly unemployed to create a huge tax bill with no cash to pay it with.

                    The larger cost is all of the time value of money buildup that you will be giving up by utilizing these funds many years before retirement.

                    Not a sermon, just my thoughts.

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                      #11
                      Originally posted by Kingxray View Post
                      We are not paying 100%. So again, why can't we do it? Is there some rule about paying off early?
                      The rule is that you must commit all of your disposible income to the plan during the applicable commitmenet period (5 years if you are over median income) OR pay 100% of approved claims.
                      LadyInTheRed is in the black!
                      Filed Chap 13 April 2010. Discharged May 2015.
                      $143,000 in debt discharged for $36,500, including attorneys fees. Money well spent!

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                        #12
                        Thanx all. I understand. Couldn't we still take the money out of the 401K and use it to make our monthly payments for the remaining 48 months? If not why? Thanx again.

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                          #13
                          Such a bad idea... why would you want to do this? remember there are penalties and taxes plus lost earnings.... and there's that increased income/payment thing.... this is protected money, use that protection wisely

                          Keep On Smilin'

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                            #14
                            You might want to respond to that increased payment question so you can get constructive input. Car payments done? Kids outgrowing daycare?
                            If your income has decreased you may be able to get your payment changed....

                            Keep On Smilin'

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                              #15
                              The 401k is an asset protected from creditors. It's bulletproof. You can always dismiss the 13 if you can't take the heat. Try to get through the plan and take out a loan if necessary. The real question is, why is your plan stepping up? Maybe your lawyer didn't negotiate hard enough (or you didn't pre plan enough), or you just may be in a *****y district that hates debtors.
                              filed chapter 13..confirmed...converted to chapter 7...DISCHARGED!

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