One year down, four to go. can I make it 2 to go?

[anunezal]

I just finished my first year in Chapter 13 with 100% repayment plan. Long wait to go, but feels good to finish the first year.

I was doing calculations, and at the end of the 3 year, the balance will be possible for me to get a 401K loan to pay the rest and complete the payments.
would it be wise to do?, will the Trustee allow it?

Positives to get out early will be to not be restricted by the bankruptcy, and get a new car, refinance house, do other financial moves, start rebuilding credit, etc.

Negatives, to get a hit in the 401k, and repay the loan. The repayment of the loan will be the last 2 years of the Chapter 13, but at my own. The interest rate of the 401k it is actually less than the 2% plus the 10% Trustee that I am paying.

Any comments, suggestions?

[shipo]

Conventional wisdom says, "Don't do it!"

As I understand the rules, whether you take three years or five, the refinancing rules are still seven years from inception of the Chapter 13. That said, you can refinance right now with a manually underwritten mortgage.

[justbroke]

I'll just leave this right here.

Never sacrifice, or mortgage, your future to satisfy your present needs.*

That means, don't take out any 401(k) loans or distributions to take care of debt today. Besides, you can't get out from a Chapter 13 "early" by paying the plan base. You must pay 100% of the allowed unsecured creditors to get out early.

(* while a 401(k) loan is paid back, you still have that loan over-your-head, so to speak. If you lose your employment and can't payback that loan, it becomes a taxable distribution... which can be very bad. That happened to me by accident and it wasn't even that I lost my job. Just an unfortunate series of events that turned my 401(k) loan into a taxable distribution. It was horrible to pay taxes on a significant amount of $$$.)

[flashoflight]

Positives to get out early will be to not be restricted by the bankruptcy, and get a new car, refinance house, do other financial moves, start rebuilding credit, etc.

You can do all of those things from inside a bankruptcy with a bit of work. Refinancing is manual underwrite with FHA whether you leave early or not. The new (financed) car I don't advise at all except as an eve of ch13 bankruptcy purchase. You want to get off the debt treadmill for good and buy used with cash. $500/month going to your 401k is a lot better than $500/month 0% APR going to a bank for 84 months. Even 0% APR on a new car is very, very bad. It will hurt your DTI on that refi too.

I also say don't do the 401k loan as well. But it's nice to have in your back pocket at year 3 in case you lose your job.

[anunezal]

thank you all for you good advice. This is good information to know. BTW, I am in a 100% pay back. So I am paying all my unsecure debt in full, that is why I may have the option to get out early by payback in full my debt.

Now, with your comments, a question came to my head. If in 3 years I lose my job, how do i keep paying my Chapter 13 bankruptcy? if I lose my job and I paid with a 401K loan, and don't have money to payback the loan, it will be in default, and I need to pay the penalty, but still manageable in that case. So, it may help to have the 401k loan as a option.

[justbroke]

anunezal, that's the exact scenario that I fear and it happened to me in a round-about way. I was in my Chapter 13 and ifled divorce. The settlement was six-figures and I was to surrender a good portion of my 401(k) to make it go away. After the 401(k) account was bifurcated, I received bad news. This was literally 30 days after it was bifurcated, my employer, of 20 years, sent me my walking papers (workforce reduction). I had work and it had nothing to do with me. I was billing and billable for 5+ more years easily. Didn't matter, they were changing direction.

Now I'm headed to the unemployment line with less than $10K left in my 401(k). I was very lucky that I was employed, again, in 60 days, but it was a crazy feeling that my nest egg / 401(k) was gone to solve the issue for that day -- divorce. Very scary!

If you are unable to pay your Chapter 13 due to loss of income you may be able to convert or at least abate your payments for some payment of time. Generally you do that on a case-by-case basis and see what happens, but conversion to a Chapter 7 could be on the table if employment is too far into the future.

[sophieanne]

I sometimes think different than others..mostly because I think we should make our own decision for what’s best for us. I read you’re in a 100 percent plan so paying after 3 years won’t be an issue. You can double check with your attorney. If you lost your job and couldn’t make your plan payment you would work with your attorney on how to proceed..possibly a conversion to a chapter 7. You won’t make much but when you take a 401k loan from work..the interest you pay actually goes to your account not to someone else. Maybe commit to increasing contributions to your 401k when the loan is paid off. All I say is look at your options and choose for yourself..only an opinion!

[Manup]

@anunezal Congrats on making it through year 1. I understand the urge to get out from under the microscope of a Chapter 13, but it has to be a business decision. Before taking any money out of your 401k, do the real math that comes along with it. If you are making it fine financially, then the question is why? The Bk is not going off your record any sooner if you pay the plan off early. Good luck!

[anunezal]

Thank you all for your comments. It is good to know both sides. Of course I just finished 1 year. Probably I will have a more clear vision after 3 years. The reasons to get out early are:
- 401K loan will be better money wise. I pay currently 12% (2% to CC + 10% Trustee). 401K currently shows me 4%. and the interest is actually going back to my account. I understand that I have to count negative the percentage loss due to not using the money in t he market, but that can go up or down.
- I am in 100% plan, so I have a fix amount paying per month. However still the trustee wants me to give my tax refunds back. So I need to calculate my deductions pretty good to control my home intake and the tax refund. Difficult to do. Also complicates how to calculate how much I put in my 401K, and want to maximize the matching by my employer.
- Not being watch by the trustee makes life not so complicated.
- I know that the BK will not go off the record sooner, however, once completed, I can start rebuilding my credit, by applying for small CC and pay them full. If I wait for 5 years, it will push 2 years more to start rebuilding. My current FICO is not too bad (middle of 600s).

Thank you for all your comments!