401K Loans During a Chapter 13 Plan

[5sracing]

I was just curious on how a trustee could find out if I took a loan out on my 401K.

[lrprn]

I was just curious on how a trustee could find out if I took a loan out on my 401K.

I'm assuming you are talking about taking a 401K loan out *after* your Ch 13 has been filed.

Remember that as the "keeper" of your bankruptcy estate for the length of your plan after you file, the bk law for Ch 13s is quite specific about requiring that your trustee pre-approve taking on any new debt. 401K loans charge interest and have a specified payback period, so even though you are borrowing the money from yourself, you would have a hard time legally proving this is not new debt.

Worse, since you would be cashing out part of a completely protected asset, it could lead to the trustee seizing your "loan" if you can't fully protect it with the remaining values in your state's bk exemptions after filing.

Last, since your Ch 13 plan was created without a 401K loan repayment figured in, if you can't repay the loan within the alloted time limit (usually one year), the tax hit can be considerable (typically 10% of what you borrowed). Your trustee will most definitely find out about that when you have to send him/her your annual tax returns, or if you have to amend your plan to accommodate paying back the 401K loan or the tax hit for not paying the loan back on time.

By taking out this "loan" behind your trustee's back, you are taking a huge chance. You are opening the door to having your Ch 13 dismissed if your trustee does find out.

[Flamingo]

I was just curious on how a trustee could find out if I took a loan out on my 401K.

Some trustees have eyes in the back of their head and some don't but if you mess up and get caught, you face dismissal - is it worth it? What happens if you lose your job and then have to take the loan as a distribution and it sits there plain as day on your tax return as taxable income for that year and your trustee requires your tax return copies each year during your Plan...Whenever it comes to anything financial in your Chapter 13, don't play games - ask your attorney before doing anything.

[klandsb]

5sracing. Honestly I can see where your coming from but I would be really nervous to jepordize my plan. I have 2 / 401 k loans I am currently paying on that show up NO where on my filing. One will be paid off within the next 2 mths. YIPPEE. Giving me a total of $200 more in my paycheck. Its your decision if you want to take that chance or not... I am not sure if after your filing anyone ever looks at your deductions on the paystubs or not. If its a loan I dont believe there to be any consequences on your tax return.

[worriedmom]

The extra $ won't make your payments go up?

[aa06a47]

Trustee probably won't know nor will ever find out. Ask yourself if you can make it without actually dipping into those funds. After it is all said and done, you really don't want that debt still owed (yes, I know your paying yourself back) after you complete your bankruptcy.

[BnkrptcyLwyr]

Good case I had can serve as an example of good planning (and which should give you some ideas) ...

Debtor had a separate "cottage" (manufactured home on a small plot) he was paying for (this is a no-no because it's like a luxury to keep paying on it) ... he only had 10k left to pay. Trustee would surely object to paying on it while not paying creditors.

So, what to do ... well, Trustee CANNOT object to 401k loan repayment. Debtor took out 401k loan, paid off cottage. Trustee can no longer object to cottage payment. Ok with the exemptions, had enough to cover it for the most part. Left only a very small amount Debtor had to pay due to liquidation analysis.

Debtor was slightly above median at his salary. Debtor was able to take one month off unpaid (he was in the union) - and he actually used this time off to help his dad, which he legitimately wanted to do anyways.

Came back a month later, he is now below medan based on prior six-months income (which is missing a month's worth of income). So he gets a three year plan.

So, Debtor goes from 5 year plan, and probably having to give up property to three year plan, keeps paying off cottage (via 401k loan), and a $250 per month plan payment to boot (which he was very comfortable with. Turned out great.