401K repayment loan in Chapter 13

[Pumpkin729]

Here's the deal....My husband and I filed chapter 13 six months ago. Had our meeting with the trustee in Dec 2004. The trustee objected to our plan for three reasons. He wants the following...

1. Turn the third car loan over (give it back) which was in husbands name for daughter. Trustee said we don't need three car loans. (ok, we agreed thats in the works)

2. Wants our tax refund for the term of plan. (no problem)

3. 401k repayment loan stopped. (retirement plan)

My husband took out a loan from his 401k to purchase a house a year and a half ago. The only way he was permitted to take this loan was if it were being used for a down payment on a house. The loan is for 10 years.

The trustee wants him to stop paying that loan and he wants the payment from the loan. Trustee say that he sees no reason why he should be paying himself back money that he can be paying his creditors with.

If we stop payment on this 401k loan there are penalties and a high rate of taxes that will have to be made. Money we don't to pay it with so now the IRS will take 2004 tax refund and set up a payment plan for the rest. Think about it what is the trustee trying to do? If that happens, don't even know if he's allow to do that by law, thats even less money he will be getting from us. The tax refund the IRS will take and then we will have to do another amendment on our plan to allow us the money to pay the penalty taxes.

Why doesn't the trustee just leave well enough alone? Seems to me he's making matters worst. Does anyone know what hes trying to do here?

Thanks in PA

[HHM]

What the trustee is telling you is this.

1. The third car doesn't fall under any exemption, so you can't exempt it from collection, and 3 cars is not reasonably necessary.

2. This is common for both Chapter 7 and 13

3. The trustee want's you to put more money into the payment plan. You have some room to negotiate here, but it depends on the trustee. How long is the loan for, when will your husband be done paying it back. Strictly speaking, a 401K loan is not a creditor for BK purposes because you are borrowing your own money, and therefore is a not a reasonable necessary living expense. The other way to handle it if the trustee insists that you actually stop is to estimate the tax liability and redo your plan accordingly.

Do you have an attorney?

[Pumpkin729]

The 401k loan is for 10 years we still have 8-1/2 to go on the loan. We want to continue paying for this loan but it seems like the trustee is pushing us to stop paying so thats more money he gets for the creditors. I thought that 401k retirement money could'nt be touched in a BK.

Yes, we do have a lawyer. He says we can give in to the trustee or fight out in court and let the judge decide. If we do decide to let the judge handle it does the lawyer have to be paid more money to take it to court?

[Pumpkin729]

two more questions....


Our plan still hasn't be granted yet. It's still in the middle of an amendment. My question is this... once the trustee grants us our plan and say we have a 3 year plan the 6 payments we already made to him is that counted as part of the 3 years? Or do we have to start from when the plan is finally finalized and lose those 6 payments?

Also, a BK is on your credit report for 7-10 years. I don't which time frame is for a chapter 13? Does it come off your credit report from the time you first filed BK or from the time you finishing paying them?

[HHM]

Money IN the 401K is exempt, but the money you use to pay back the 401K loan is property of the Chapter 13 Bankruptcy Estate, which is why the trustee is objecting. Basically, you better negotiate something with the trustee that he/she will accept.

Doesn't sound like your Attorney is very proactive. But, the fight occurs at the confirmation hearing, and that should be included in the attorney fee for a chapter 13.

As for credit reporting, it really doesn't matter, the negative effects of a bankruptcy only last about 2-4 years.

[dck]

I had a 401K loan also, although it was only a couple years from being completed. They never discussed it or said anything about it. It will be paid off in a few months and I am sure it was figured into something. I would bug your attorney more, (even though most act as though they don't have time to talk to you). It sounds like it may be worth going to court over. Good luck.