Question re. 401K loan at work

[sophieanne]

Hi..this is just a discussion a few of us were having. If you take out a 401K loan at work, is that considered a loan (since you're borrowing form your yourself and paying yourself back with interest).
And if you take such a loan does it need to be reported to your attorney or trustee?

Thanks/have a great day!

[PatG]

From my understanding this is not allowable without permission from the trustee, and it most likely will not be approved. By taking out this loan you are going to be required to pay it back through your paychecks, thus incurring additional monthly debt.

[LadyInTheRed]

And if you take such a loan does it need to be reported to your attorney or trustee?

Why are you reluctant to "report" it to your attorney? This is a question you need to ask your attorney because the answer may vary by location and individual case.

I took a 401k loan during my chap 13 without getting court approval, but only after checking with my attorney. My attorney said that a 401k loan is a loan from myself and therefor not really a loan. He said I could take the loan as long as it didn't jeopardize my ability to make plan payments. I think my attorney was following the reasoning that of the 9th Circuit Court of Appeals in the Egebjerg case that ruled a 401k loan could not be used as an expenses on the means test for the same reason. But, in another court with another trustee, the answer might be different. Some trustees may look at the fact that you are able to make a payment on a 401k loan as indication that you have additional disposable income that should go to your plan.

[sophieanne]

Thanks for your response PatG and Lady.

Lady - this was really just a conversation. I think the feeling was that a 401K loan from work is really not a loan (like you said), but it's eaier to do than to ask and be told no .. but only if
one can afford it.

I agree, asking the attorney would be thre right thing to do.

[switch625]

Curious what an attorney or trustee would say If someone were considering a 401K loan and they are in a 100% plan.

[BarkingCat]

I suppose one thing to keep in mind is that something outside your control could happen to your job or your employer -- you could get laid off or your company could get acquired -- that would require you to repay the outstanding balance immediately or end up paying taxes + the 10% penalty on the amount outstanding. The latter (not paying the outstanding amount) would also result in you getting a 1099.

[LadyInTheRed]

I suppose one thing to keep in mind is that something outside your control could happen to your job or your employer -- you could get laid off or your company could get acquired -- that would require you to repay the outstanding balance immediately or end up paying taxes + the 10% penalty on the amount outstanding. The latter (not paying the outstanding amount) would also result in you getting a 1099.

Or, even if you want to leave your job because you want to relocate or you find a better position. I occasionally learn of a job I would be perfect for and then remember that I would have to come up with money to pay off my 401k loan or take the penalty and pay income tax. Good thing I am very happy in my job and would only leave to work closer to home. It also helps that I love my commute that looks like this:

:

[sophieanne]

Lady - Now I'm jealous...what a beautiful view

[LadyInTheRed]

That's the end of my morning commute. The cranes in the far distance are near the the beginning, not counting the 10 minute drive to the ferry terminal.

[dmc-2008]

That is a beautiful commute!!!!! Is that the bay bridge?

[LadyInTheRed]

Yes, dmc-2008, it is. And Treasure Island.

[justbroke]

Curious what an attorney or trustee would say If someone were considering a 401K loan and they are in a 100% plan.

The Trustees and creditors really don't have any say as to what you do with disposable income in a 100% plan (period). So long as you don't jeopardize your plan you would be just fine to do many things in a 100% plan. In fact, if you're in a 100% plan, your attorney should make sure your Plan is drafted so that you don't need to surrender tax refunds, submit tax returns (because the Trustee is only looking to "increase" your payment -- but you're already in a 100% plan!), and/or seek permission to incur debt (outside the ordinary course of business).

Whether it is smart to take out any loan while in an active Chapter 13 plan, 100% or not, is a subjective question and is specific to the debtors very specific and unique circumstances.

[sophieanne]

Just Broke - thank very much. I know a few of us have been waiting/curios to see the response to that question. Thank you very much.

Is money obtained from a 401K via a work loan while in a 100% plan considered disposable income. Plus if it's a loan, isn't that not allowed in bk?

[jmac]

I did a few small ones along my 5 years of ch13, which i will also say i think is wrong because it cost you so much in the long run but completing my 13 was my #1 priority, also made many changes in the amount i was putting in from 7% to get max company match to 16% depending on how my funds were looking which could be a good argument for changing you DMI drastically. I'm not in a 100% plan been at my same job for 25 years so it was a risk i took without asking.

[justbroke]

Is money obtained from a 401K via a work loan while in a 100% plan considered disposable income. Plus if it's a loan, isn't that not allowed in bk?

Some attorneys opine that it's not a real loan because you are paying yourself back and it's secured by your 401(k) balance. A debtor should always contact their attorney before doing anything related to incurring debt or are questioning whether a 401(k) loan is a.) subject to disclosure to the Trustee/court, and/or b.) an act of incurring debt.

If you're in a 100% plan, borrowing from your 401(k) plan should be moot. This is because your (Chapter 13) plan should not have any provision which prevents you from incurring debt, submitting tax returns, and from turning over tax refunds. (The debtor should, however, make sure that the loan repayments do not jeopardize the Chapter 13 plan payments.)