Help! We borrowed from our 401k before court on Chapt. 13

[caveman44]

Not the smartest thing to do, so before I'm bashed for that.... we needed the money....had nothing for gas, grocery, prescriptions, and several other bills, as well as needing to replace our leaking roof....expenses that we couldn't add to the Chapt. 13. We filed May 21, 2008 and then had to borrow from the 401k on June 10th....went to court June 18th. There are no tax implications with us borrowing (other than interest on my own money) and my job is very secure...so before anyone asks about that......Anyway....I thought we could borrow from the 401k as that is our own money, and they never inquired about the 401k other than to ask when the payments would end on our previous loans..which aren't for 5 years...therefore they wouldn't affect this term of Chapt. 13 which ends in 3 years. Now, my attorney's office is wanting an updated statement of the 401k status because they want to make sure the loans are due to be paid when I stated...because they may want to increase our payment. The 401k loan payment is $2 less than it was in May, because when we borrowed, we paid off the one existing loan, and added this one. I didn't say anything about it because I didn't think it was an issue, and now I'm freaking out because I don't want my attorney to think I was hiding it neccessarily, I really just didn't think it was an issue. Now I'm afraid our case will get dismissed and as it's so new, I'm sure we're screwed financially. We'll lose everything...as we're barely hanging on as it is.

If anyone can offer advice.....without judgement and berating....please help. Thank you.

[MOMof3]

Take a deep breath. You have legitamate reasons for borrowing the money. The money is your "savings"--in essence you borrow from yourself, it's not a line of credit. The only way it should hurt you is if you cannot afford to make the payments. If your lawyer asks, just tell it like it is, you used the money to cover expenses that were necessary. I think the worst case scenario is that the payment won't be considered an "expense" by the trustee & you will have to pay it from money you designated elsewhere in your budget.

[rrockinggramma]

tell them you refinanced the 401K loan to make sure it didn't kick in repayment wise until your chapter 13 was done. Send in the documentation and wait for the attorney to call you. They are probably looking for repayment amount and not "looking" for anything else. GL

[diviaruba]

Bad, bad, bad. You cannot take on new debt or refinance old debt, even from yourself, without the trustee's approval in an active 13. Your financial life is in the hands of the trustee while you are operating under the protection of the 13. While it may well work out for you, the potential consequences could include disallowances of the payment on the "new debt".

Think of it this way - even though you used the new loan to pay the old, the debt that existed at the time of your filing has now been extinguished. The payments that were to go to the allowed 401K loan - the old one - no longer exist. That money is technically available to pay into your plan. The payments on the "new" debt, not approved by the trustee, may have to come from another part of your budget, while the payments on the "old" debt can now be forced to be made into your plan. Not saying it will happen, but you should be prepared for a grilling prior to your confirmation.

Not to make you feel worse, but you pay all of that money for your attorney, and you go off and do this without even consulting him/her? Prior to the 341, no less? Prior to confirmation? This is your most vulnerable time, and really where your attorney earns their keep.

[caveman44]

We did not extinguish any payments with this 401k. We still pay the 401k....we did not put those loans into this bankruptcy and we were not actively in the Chapt. 13 when we borrowed. Granted, we probably should have consulted the attorney and that is our bad....but honestly, we were under the impression that as long as we were able to make the payments on the 401k along with the bankruptcy payment, it was okay. Also, what are we expected to do when we do have financial needs such as those that arise? There are always extenuating circumstances in everyone's life that come up suddenly. For us, I had hip replacement surgery and was out of work for 6 weeks. My son has severe asthma and his medication is $350. Our car needed repairs, as did our leaking roof. Along with other medical bills that weren't filed in the plan because they were incurred following the initial filing. If worse comes to worse, we'll make up the difference as we're ridding ourselves of another small monthly debt. It's only a $60 payment. As I said, I wasn't looking for a bashing, I was looking for some advice that helped me, not berated me.

[diviaruba]

We did not extinguish any payments with this 401k. We still pay the 401k....we did not put those loans into this bankruptcy and we were not actively in the Chapt. 13 when we borrowed. Granted, we probably should have consulted the attorney and that is our bad....but honestly, we were under the impression that as long as we were able to make the payments on the 401k along with the bankruptcy payment, it was okay. Also, what are we expected to do when we do have financial needs such as those that arise? There are always extenuating circumstances in everyone's life that come up suddenly. For us, I had hip replacement surgery and was out of work for 6 weeks. My son has severe asthma and his medication is $350. Our car needed repairs, as did our leaking roof. Along with other medical bills that weren't filed in the plan because they were incurred following the initial filing. If worse comes to worse, we'll make up the difference as we're ridding ourselves of another small monthly debt. It's only a $60 payment. As I said, I wasn't looking for a bashing, I was looking for some advice that helped me, not berated me.

Not bashing or berating, just trying to give you the facts. Not I, nor anyone else on this forum, I daresay, would begrudge you any of the items you said were needed. You don't need to feel the need to justify the money, but you asked about the consequences.

While we're on the facts, I don't see how these square:

We did not extinguish any payments with this 401k. "The 401k loan payment is $2 less than it was in May, because when we borrowed, we paid off the one existing loan, and added this one."

We did not put those loans into this bankruptcy and we were not actively in the Chapt. 13 when we borrowed. "We filed May 21, 2008 and then had to borrow from the 401k on June 10th....went to court June 18th."

...but honestly, we were under the impression that as long as we were able to make the payments on the 401k along with the bankruptcy payment, it was okay Unfortunately, that is the reason why the requirement exists to get trustee approval. Your impressions will only lead you into more difficulties.

[AngelinaCat]

We still pay the 401k....we did not put those loans into this bankruptcy and we were not actively in the Chapt. 13 when we borrowed. Granted, we probably should have consulted the attorney and that is our bad....but honestly, we were under the impression that as long as we were able to make the payments on the 401k along with the bankruptcy payment, it was okay.

Dear caveman44, you have my sincerest sympathy--no bashing from here. My advice is to go first thing tomorrow and talk to your attorney about this and see how the damages might be mitigated.

I do so hope and pray that you have a competent attorney that you can actually communicate with. We did not have that luxury--yes, it IS a luxury--Our attorney did not properly communicate with or educate us in what to do or NOT do while preparing to file for any type of bk, whether 13 or 7.

As a result, we have been left with a hell of a mess to sort through and try to fix ourselves, pro se. We have dismissed our legal nincompoop.

Click this link for more details:

http://www.bkforum.com/showthread.php?p=169007#post169007

Our very best wishes and prayers go for you~~~

[HHM]

If you have no money for regular expenses and had to borrow from your 401K, how are you going to afford the chapter 13. It does not add-up.

[Flamingo]

I won't bash but I will tell it like it is. Just because your 401(k) money is exempt from your BK filing, if you use that money during your Chapter 13 (distribution, loan, etc.), you can open up a whole can of worms as to your Plan. You need to consult with your attorney to clean up the situation as best as you can, if you can, and if you are able to make it through this Plan, just forget you have a 401(k). If you are struggling now, how will you be able to make Plan payments for the next several years...keep taking distributions from your 401(k)? If you do that you pay taxes and penalties on the withdrawals and they also have to be reported on your taxes each year as income and if you are required to turn your tax returns in each year after filing to your Trustee as many folks in Chapter 13 have to do, it's all right there in black and white that you have extra income coming in via distributions that was not reported to the Trustee.

We all know it is a struggle under a Chapter 13. Chapter 13 is hard and an eye opener. However, there are certain requirements that have to be observed and if you want to save the money in your 401(k) to have for future retirement, forget you have it now and do not touch it again during your Plan.

Best of luck to you....

[holding on]

So to help caveman44 plan for this, what is the worst case scenario? I'm thinking its that whatever the monthly repayment is to the 401k, that this is what the plan payments might increase by? Would there be any other penalties such as penalty for violation of incurring new debt without approval?

[caveman44]

Currently Wife is not employed, but will be soon

My wife's job starts in August. It's with a school, that's why she's off this summer. Her employment was just confirmed and that is why we're assured we'll make our payments. Our payments are low, $250/mos. and the 401k loan payment is low as well. It was just a tough time with paychecks not coming in regularly, as well as I mentioned before, extenuating circumstances that came along. Life....as it happens....does not always go by the rules of the courts.....and although we're naive about all of this.... we should have inquired. I think with anything like this court stuff.... you freak out easily....because when you've always been a good worker, a person that abided by the law your entire life, and then you're put in a situation to actually have to deal with lawyers and etc..... you just can't think straight. My wife has been having severe anxiety attacks and I too haven't been able to sleep well at night. Our biggest concern now is whether or not we can keep up with our mortgage....because it's an adjustable rate that increases in August by a small amount. Can't refinance....for obvious reasons, but tried to prior to this mess......but our value dropped so much because of the many foreclosures in our small town. Now we're sitting on what I'd call an upside down mortgage.... owe more than it's worth. We've considered foreclosure....but that's like the end of all ends for us..... pride as well as financially wise. Our son has only known this house.... and our neighbors know and like us well. It's not beyond our comprehension though.....because we know that financially.....it may be what's down the road for us.

Anyway....thanks to those of you with great supportive information....and those of you that still had to put your two cents worth in..... I know I asked for no bashing or berating.....but when you're highly emotional about such things.........you just want someone to tell you to relax.....and that it might come back to bite you.....but then again....it might not. I have yet to hear from our attorney on this either. I guess they're off today.

Caveman44

[keepmine]

If you're upside down in your mortgage and, have an ARM you are about to make the biggest financial mistake of your life by hanging onto it and not letting it go in a chapter 7.
You better stop worying about what the neighbors think or how your son will feel and start making decisions based on what makes financial sense. Bk is just a business decision and you want to exit bk in much better shape than you went in and that's hard to do if you're dragging a depreciating asset with bad financing through the bk.

[caveman44]

WHEW! Finally heard from the attorney about our chapter 13 and they said that all the Trustee wants is to know that the 401k loan was for more than 3 years, the length of our plan, which the loan is for 5. YES! I know how stupid we sound...first taking out a loan..... second....wanting to keep our house of 15 years....... one that we gutted and completely renovated top to bottom.....in a small town that is being swallowed up by foreclosures.....but our hopes were that our magnificent govt. would finally get a handle on the mortgage crisis....and again....that's like hoping for a miracle. We're going to see what we can do. I'm currently trying to figure out if my richer than life sister would want to purchase the home and contract for deed it back to us. It's cheap enough of an investment for them.....and so there we are. I'm in the clear and have learned my lessons. Thank you to ALL that were so gracious in your advice....and thank you to those that call em as you see em. We're going to make it through this thing....I promise you.....and if we don't......I'll give you all the right to say....."I told you so" by coming back here to post. Have a great weekend. I know I will now.

[arkienurse]

Before you go and sign any paperwork with your sister, be sure and run this by your lawyer, just to make sure it will be kosher with the trustee.