Chapter 7 Predischarge 401K Loan?

[BubbaLou]

My son's and daughter-in-law's Chapter 7 case has not been discharged yet. It still has about 30 days to go.

They are fully aware of the thoughts of borrowing money from a 401K and that generally it is not a good idea to borrow against one's future. However, at this time it is their only option.

He asked his attorney who told him what everyone else has. He told him that it is not wise to borrow against his 401K. He said he couldn't stop him from getting a loan, and that he would not be able to get any other loan for about 75 days.

They want to take out a loan about a $5000 from his 401K to finish paying off a student loan balance because the interest and collection costs are eating them alive and it will not be discharged .

His only concern is he is not sure if this is allowed prior to discharge although he has been flooded with offers of predischarge auto loan offers. He definitely, does not want to take out this loan and lose it to the trustee or other unsecured creditors and be stuck repaying a payroll deducted loan that was not used for its intended purpose.

Having been searching for answers to this question, but have yet to find one.

[keepmine]

In the grand scheme of things, interest on $5k isn;t that much.
I'd suggest some pt work to get this paid off or, are you in position to cosign a loan for them at a reasonable rate.
Just don't touch that 401K. They have choices other than that.

[HHM]

I'd try to work out a deal with the student loan. Maybe he has already tried, but still, that should be a first approach. I.e. offer an automatic debit from the bank account in exchange for reseting the interest rate to something more reasonable.

[Flamingo]

The mailings from the auto loan places are sent to everyone by predator car dealerships just waiting for the names and addresses of folks who file BK 7. More will be sent after discharge. They all know your son and DIL will be debt free after discharge and will circle like sharks in the water. Your son and DIL need to listen to their attorney as to their 401(k) at this point in time or question him/her further if they are firm about wanting to take out that loan. If they have already been advised by their attorney, you are one heck of a dad for searching for them for other options.

[BubbaLou]

Prior to filing for the bankruptcy he tried numerous times to work out arrangements with these folks at the holder of the student loan before they started garnishing his wages at 15% per week. This was one of the factors that practically forced him into bankruptcy. The garnishment has been temporarily suspended during the automatic stay.

They never wanted to make any arrangements with him and kept giving him the run around until a $2500 loan which proved useless anyway turned into an over $12,000 loan.

As soon as the automatic stay is over, the suspended garnishment will proceed as ordered and without notice.

He is just considering his options, albeit maybe some not so great, but still an alternative.

I don't know a lot about bankruptcy and the process so I don't know if a just a regular loan is out of the question and I don't have a problem consigning for him if needed.

However, before he gets a loan or I cosign for one, we want to make sure it is legal, safe, or exempt meaning that it can be used by him and not seized by the creditors or the trustee. He does not want to get a loan and it not be used for its intended purpose. This will only start him off in the wrong direction again.

Can some one please point me in the right direction here. Are there any statutes or regulations regarding loans in bankruptcy?

I know the trustee told him at the meeting told him if he were to come into a large inheritance, lottery winnings, or a settlement form a lawsuit that he had to contact his attorney or the bankruptcy court but he isn't expecting either.

Just unclear about the whole process and what happens to the proceeds of the loan regardless of the source. Whether it be a bank, loan institution, or a 401K.

Does anyone know the rules or laws regarding loans during bankruptcy or after.

Thank you.

[keepmine]

Post bk discharge, his finances are his business. He can do as he pleases. He can pay anyone he wants to and nothing other creditors can do about. He just gets a loan and writes a check to whomever is collecting the student loan.

[Flamingo]

If your son takes out a $5,000 loan from his 401(k) prior to discharge, the court could view it as that if he took out $5,000 to pay off student loans, that $5,000 could go to creditors. I am sure your son's attorney told him that but it appears your son is adament about taking out a loan from his 401(k) and from what you state in your posting, the attorney advised him not to. Maybe your son is not giving you the complete conversation he may have had with this attorney over the loan timing. Keepmine's posting is correct. If he wants to take out a loan after discharge from his 401(k) it's his money and he can do what he wants. It appears from your posting that they have only about 30 days until discharge. There is a certain amount of time after a Chapter 7 discharge where if one receives lottery winnings, an inheritance or a windfall of some sort, it has to be reported to the attorney and trustee. I am not certain what that time limit is but one of th Chapter 7 experts on here can advise you of that, but it does not include taking a loan out of one's 401(k).

[lrprn]

What's the rush? Surely your son can wait 30-45 days to do this. It's just one more month, two at the most. Why risk converting a safe asset (401K) to one that can be taken by the trustee (cash) during an active Ch 7?

[BubbaLou]

The only things he is worried about, are the student loan holder garnishing 15% of his wages after the automatic stay and seizing his tax refunds and stimulus check.

The refunds are not very large and were not even an issue at the 341 meeting because of the amount of debt owed.

He was granted an automatic extension this year and recently received a letter stating the holder of this loan was suspending its efforts to collect the refunds and the holder even suggested that he wait 4 weeks before filing his returns to provide them and the government enough time to communicate the suspension order. He has since filed and is hoping everything is processed before the suspension is lifted.

He is going to contact the holder again, and try to make some arrangements before this period ends. However, he is not expecting them to be very accommodating at this point.

If not for these reasons, he probably would not be so anxious to get a loan. However, given the circumstances and not knowing anything about the bankruptcy process he did not want to stand by doing absolutely nothing and then discover that he had waited 30-60 days longer than he needed to.

He is just exploring his options at this time and I am trying to help him the best I can. But, I too am not familiar with the bankruptcy process and laws other than what I have learned in this great forum and numerous other web pages and sites on the web. I am just trying to help them through a somewhat difficult time when difficult choices were made.