borrow from 401k to pay off 13

[spmtf]

I am 2 years in to my 13. After year 3 my payment increases when my 401k loan ends. Can I then take another loan and pay off the 13 to end it early? I am not in a 100% payack.

[justbroke]

I am 2 years in to my 13. After year 3 my payment increases when my 401k loan ends. Can I then take another loan and pay off the 13 to end it early? I am not in a 100% payack.

This is a question for your attorney. You would need a payoff figure from the Trustee's office. In cases filed after October 2005, you are required to pay 100% of the "allowed" unsecured claims in order to pay off early.

While you are not going to take a "distribution" -- you mention loan -- I just want to mention the following. Anyone looking to take a taxable distribution to payoff a Chapter 13 needs to weigh the "future" dollar costs and, more significantly, the tax implications of taking a taxable (early) distribution from your 401(k). Since you're thinking of just a 401(k) loan, this may be a better plan, but you still need to see what the actual pay off amount will be (100% or what your Plan lists).

You really need to run the numbers, because it might be cheaper -- using the current "cost" of money -- to pay into the Chapter 13 for 5 years, versus taking a loan and paying 100% of the allowed unsecured claims. On one hand, by continuing to pay through the end of the plan, you may only pay 20% of the allowed unsecured claims. On the other hand, by paying early, you may have just put yourself in the position of paying 100% of the allowed unsecured claims.

It is all about the math!

[HHM]

As Justbroke points out, you will need to pay 100% of allowed claims, not just the balance of your plan. So if you have $60K of allowed claims, but you are only paying $20K back in the plan, to pay off early, you need to pay all $60K, not just the remaining balance on the $20K.

[BKAttyMI]

Not to mention most districts have strict rules against "obtaining credit", which I would assume includes loans from your own 401(k). Why would you want to strap yourself with a 401(k) loan over paying off a plan?

[spmtf]

I don't want to take on new debt, I was just looking to borrow so I can end this early. I would be paying myself back so really there would be no differance. I'm only paying unsecured back at about 10% so this is a non starter anyway. Thanks.

[justbroke]

spmtf, I'm glad that you looked at your percentage payback. This is precisely why you may not want to use exempt cash to pay 100% when you only need to pay 10%! I wasn't worried about the loan itself, since you'd be paying yourself back anyhow. Chapter 13s actually do allow you to obtain new credit with permission.

Specifically, you would have needed trustee permission to use your 401(k) -- as a loan -- to payoff the plan. Our friend and moderator Flamingo did just that, but did it through a mortgage refinance.