Loan from 401K ??

[brokeguy]

I will have report as income my proceeds from my 401K loan ($10,000)-started new job 12/06a nd have not made any payments to 401K
My bankruptcy will end in Sept of '08..
Does the trustee ask for a final tax statements ??

[lrprn]

Welcome to BK Forum, brokeguy...glad you found us!

Since you are in the Ch 13 area, I assume you filed Ch 13.

The information you shared is very thin....some questions for you before we can help sort out the answer to your question:
- When did you file Ch 13?
- When did you take out the 401K loan and why?
- When did you stop making payments on the 401K loan? Did you make payments before?
- Is your 401K early withdrawal subject to tax penalty (typically 10% of the value of the loan) at the end of this year? If yes, then how are you planning to deal with a $1000K tax hit that will land early next year in your Ch 13?
- Does your attorney know you took out this loan?
- Last and most important question - does your trustee know you took this early 401K withdrawal while you are in an active Ch 13?

If your trustee is a prickly one, he/she can easily find out about the $10K when you turn copies of your 2007 taxes over - most trustees require that - does yours?

Here's the problem - you've converted a protected asset (401K) to an unprotected one (cash) while in Ch 13. It's possible you could lose the $10K to your trustee if he finds out you have it. I hope you discussed that possibility with your attorney. If you haven't, go discuss this with him/her right away and find out what potential Pandora's boxes you might have opened for yourself here.

[SinkingFast]

Generally with a 401K loan, the money was spent long ago.

But if you are terminated or leave your position, the loan becomes pay and due able. Many plans allow for former employess to continue making payments as agreed. But if you do not, then the Investment Company calls in the loan. That's when you become tax liable for the loan proceeds.

This is a tricky issue. It's not like you actually received the money this year. Unless you did take the loan this year.

Sounds like it's time to call your attny and have chat about where to go from here.

And Lrprn is right. You're gonna have a hefty tax penatly to deal with come tax filing time in the Spring. You need to plan for that as well.

[brokeguy]

Filed chap.13 in May '05
This was a loan from 401K that i took out to stupidly pay down CCs 2 years before filing.
60 days after I resigned from my old job,the loan was due.
I wanted to wait till next year to report it as income,but that can't happen.
I'm just going to keep making my payments and see what happens-hopefully nothing.
I know I'll have to pay a penalty and taxes ,.
In hindsight,I should have filed in 2003 and not taken out that loan.

[brokeguy]

I meant making payments to the Trustee....

[CATCHMEIFYOUCAN]

I had a loan for a little more than 10,000 that I was still owing on through payroll deductions. Overall I was paying about $600 back through payroll deductions (but I also had 2 full time jobs). The Trustee never questioned it. The cool thing was it was exempt from my "disposable income," expected at $800 a month. Had it not been exempt I would be paying $1400 instead. In the end though, I ended up quitting one job and converted to Ch7 from Ch13. However because I quit the one job, I owed a tremendous penalty in taxes (a little over $5000 for 2006).

Just my experience, Catchmeifyoucan

[lrprn]

Filed chap.13 in May '05
This was a loan from 401K that i took out to stupidly pay down CCs 2 years before filing.

If you took the loan out two years before filing, then it is not a part of your bankruptcy estate. The trustee can't do anything with the $10K - you're out of the woods on that, thank goodness.

60 days after I resigned from my old job,the loan was due. I wanted to wait till next year to report it as income,but that can't happen.

Yes, you'll have to report it now. However, since you spent the money before filing, if your trustee notices it on your tax returns, you and your lawyer can explain the circumstances. It was a one-time increase from three years ago and from before you filed. The trustee can't raise your payment based on that because the income change isn't ongoing and permanent.

You do need to call your lawyer to discuss options for how to pay the taxes that will be due. Some trustees will reduce your payment or allow you to skip a month or two when one-time costs like this come up...you won't know unless you ask.

I know I'll have to pay a penalty and taxes ,. In hindsight,I should have filed in 2003 and not taken out that loan.

Welcome to club of "I wish I'd filed sooner"....you have lots of company here! Many of us hung on for far too long hoping somehow to climb out of the hole, but instead just kept sinking farther and farther under. Better to have filed when you did than to still be struggling. You're only 10 months from being done - that has to feel great!