Chapter 13 and 401k Loan

[sox1965]

I'm in year 2 (out of 5) for my Chapter 13 repayment and am current. I would like to take a large 401k loan ($40k) for education purposes, small vacation, and home improvement. I already have a loan payment on my 401k that will drop off this December. That's when I would get the new 401k loan and the dollar amount per pay would equal the existing.

Would there be any problems doing this? My attorney says its okay as long as I continue to make all promised payments - which I am.

Thanks,

JJ

[klandsb]

wow... maybe I am missing something but I thought everything had to be approved by the trustee before you can take out ANY loan. Maybe because you are borrowing from yourself ?????
I went round & round about my 401k loans being allowed or not on the means test. I know for certain (ha,ha) that they can be . I even sent them a copy of the 1322(f) information. Long story short, I have 6% the max allowed, taken & match by my employer for my 401k. Its approx $220 a mth. I figure if they include my loans also which are $ 240 amth and that would make $ 460 a mth in 401k pmts. I dont think the trustee would allow such a large amount so I am leaving the loans out of the means test. One will be paid off in 4 mths anyway and its the larger one. I hope I am doing the right thing.....

[AngelinaCatHub]

This would be very foolish. You are taking exempt money, getting penalized and taxed, risking your bk, for what? Fun? Vacation? Please reconsider. Your thinking makes me believe you will never survive your bk and be back in the same mess where you cannot bk to get a new start. Best to think this our practically, not for immediate satisfaction. Ever hear of a PEL grant? Your schooling can wait for other sources of income. 'Hub

[walkthaplank]

This would be very foolish. You are taking exempt money, getting penalized and taxed, risking your bk, for what? Fun? Vacation? Please reconsider. Your thinking makes me believe you will never survive your bk and be back in the same mess where you cannot bk to get a new start. Best to think this our practically, not for immediate satisfaction. Ever hear of a PEL grant? Your schooling can wait for other sources of income. 'Hub

A 401K LOAN only has tax implications if you don't repay it as it is treated as a disbursement.

I would think that taking a new 401k loan would require trustee approval unless OP is in a 100% plan.

[sox1965]

Correct - it's only a tax penalty if I don't repay it. My last 401k fetched a 10% return rate - this was when everyone else's was falling due to the economy. It was a good time to take a loan.

The trustee didn't say anything about my 401k loan last year that I had opened and was repaying on my own to my company.

I guess the only thing that could be an issue - is if I'm laid off. Then it's all immediately due. yikes.

My monthly payment to the trustee is only $60. I don't want to bother them with my home expenses, (new roof, doorwall, furnace/air). What would they do - modify my payment down to $10 per month? I guess I'd just rather keep it the way it is - and take out my 401k loan.

[walkthaplank]

My monthly payment to the trustee is only $60. I don't want to bother them with my home expenses, (new roof, doorwall, furnace/air). What would they do - modify my payment down to $10 per month? I guess I'd just rather keep it the way it is - and take out my 401k loan.

It is not an issue of "bothering" the trustee, I think the bigger picture is that if the trustee finds out that you incurred more debt, they may decide to move for dismissal of your case. If your lawyer says they won't, well hopefully your lawyer knows the trustees and what they worry about. Of course if your lawyer is wrong it is an "oops" for him but you are in deep kimchee.

[Flamingo]

What you fail to realize is that you are not in control of any of your finances during the term of your Chapter 13 plan, the Trustee is, no matter what the amount of your payment is to the Trustee. Any and all loans or disbursements taken out of your 401(k) need trustee approval; those are funds that are exempt in a BK filing but when taken out during the course of your Plan are funds that can also be distributed to creditors. If you have already spoken with your attorney about this and got an OK (apparently the attorney discussed with your Trustee), why are you on here asking further permission?

[mitchell]

... those are funds that are exempt in a BK filing but when taken out during the course of your Plan are funds that can also be distributed to creditors.

I have a 401k loan that will be paid off in May of next year.

I'm waiting for my 341 so I'm far from knowledgeable on this, but I was informed by my lawyer that once that loan is paid off, the trustee will increase my payments by the amount I was paying toward the 401k loan.

I guess it is viewed as an increase in disposable income and they will adjust the payment accordingly. That being said, at least in my case it sounds like any future loan from a 401k would be impossible.

[zeezee]

I have a 401k loan that will be paid off in May of next year.

I'm waiting for my 341 so I'm far from knowledgeable on this, but I was informed by my lawyer that once that loan is paid off, the trustee will increase my payments by the amount I was paying toward the 401k loan.

I guess it is viewed as an increase in disposable income and they will adjust the payment accordingly. That being said, at least in my case it sounds like any future loan from a 401k would be impossible.

I am in the same boat. When my 401k loan is paid in a couple of years my payments will automatically go up by that amount. It was already figured into my repayment plan!