401k loan & bankruptcy

[albacore44]

The problem is two fold and is indeed a catch-22. Technically, 401(k) loan repayments and contributions are not allowed expenses in a Chapter 7. However, if you can prove "special circumstances" this can be overlooked. Many Trustees read "special circumstances" to be of the type that are listed in the Code like medical reasons or military duty, so the bar is high. The Trustee's don't use IRS rules as the Bankruptcy Code stands on its own and only includes IRS code by explicit inclusion or reference.

As for LALady's specific case, I don't know how many years she has left to pay her loan back, but many Trustees will consider that if the loan payments stop within 5 years, then the debtor can be in a Chapter 13 and start contributing those payments to the creditors. It's not simply a matter of they are not allowed in a Chapter 7. The real problem is that the hypothetical Chapter 13, that they must use to determine if you have the ability to pay, allows either a 401(k) loan repayment or a contribution (but usually not both).

So, will LALady's "special circumstance" work? It's up to a Judge to decide at this point. The only time I've read 401(k) special circumstances is when the person was close to retirement. It is never a matter of whather it's mandatory for employment.

which goes back to having a good attorney to work up your allowed expenses in a ch-7.

in my case i am -387 DMI, and that does not include my $800 a month 401K loan repayment

[LALADY]

Over 4 years left to pay @ almost 900/mo. 25 years from retirement. Sole breadwinner (single). No medical, military, special circumstances.

M/D (simple terms as it is 50 some pages) -- (1) mandatory to pay the 401k back (2) per the employer's terms when loan taken (3) out of payroll deduction (4) if I am employed. Conversion out of ? as I cannot pay 100% back to 401k and 100% to creditors over 5yrs. Partial payments not allowed by plan and must be paid by payroll deduction, not bk. Per panel trustee, Chap13 requires I pay 401k back at same % as creditors and that it be paid by BK so there is also tacked on admin fee. Ch13 is moot because I cannot afford to be canned under terms of 401k. My only option is Ch7. If that fails, I am back to sq.1 b4 filing.

I'm not making this stuff up, I tell you.

[justbroke]

Your Trustee is stupid. In a Chapter 13, 401(k) loan repayments or contributions are not part of the Bankruptcy estate so cannot be included in the DMI. I think your efficient attorney will win just because your Trustee is stupid.

But remember this... there is nothing in the Bankruptcy code that reads that you are entitled to relief under one of the Chapters of Title 11. In other words, just because you don't qualify for Chapter 13, doesn't mean they have to grant a Chapter 7. But that's all moot with what you just posted.

Your (panel) Trustee is on crack or some other mind altering drug. However, the Trustee does have an argument that if you're in a Chapter 13, then in year 5, you could pay $900 x 12 or $10,800. Even more if you count the possibility of income tax overwithholdings and anything else in the mix.

[kornellred]

In my Chapter 13, my 401K loan repayments were definitely considered as legitimate expenses which subtracted from my DMI. Otherwise, I would be paying $400 per month more than I actually am paying. The loans are long-term but they will be paid off before the Chapter 13 plan is complete. There was no mention of having to increase my plan payments when the loans are paid off.

It could simply be the luck of the draw when it comes to Chapter 13.

[justbroke]

It could simply be the luck of the draw when it comes to Chapter 13.

I think it's a matter of your Trustee. Some Chapter 13 Trustees are so nice, like mine. Didn't question anything when she should have questioned multiple things.