Taking 401K loan to pay for college

[GHG7F0]

Would it be illegal or fraudulent to take a loan from my 401K to pay for my daughter’s college for 24K and then down the road file for chapter 13?

Thanks in advance...

[AngelinaCat]

Please don't raid your 401(k). You may have all the best intentions to pay it back, but *life* happens, and you won't be able to do it. In addition, you will be hit with major tax penalties.

We took a loan form 'Hub's 401(k) trying to pay down our debt and avoid BK. We were not able to pay it back, and ended up liquidating it altogether. We are still paying the IRS some of those tax penalties.

Your daughter needs to look into scholarships and/or grants to help with college.

[GHG7F0]

I have a very secure government job, so paying it back would not be a problem. As a matter of fact they take it from our check like it or not. If I end up doing a 13, I was thinking I could include it in the plan or would this be fraudulent?

[kjrmom911]

If your intent all along is to file bk then it sounds like fraud to me, but that is only an opinion.

[AngelinaCat]

If you plan to include the loan repayment in your Ch13 payment plan, then it may not be fraud. But I am not a Ch13 guru. Flamingo, HHM, justbroke and lrprn are more knowledgeable in that area than I am.

ETA: Do you have other debt problems that make filing a Ch13 in the future, a possibility?

[bpokey]

It's my understanding that a 401k loan is not dischargeable. period. Worst case scenario, it'll be classified as a hardship distribution and taxed/penalized accordingly. I've been wrong in the past though... (2 ex wives)

[jange]

Speaking on how mine was handled it just reduced my disposable income, a 401K loan is not consider a debt (only to yourself) or included in the plan. Keep in mind many trustees will not allow a 401k loan payment and 401k contributions. at the same time.

[debee]

In CA, 401K loan repayments are allowed expenses in a chapter 13. (They can exist in a chapter 7, just not as a qualifying expense.)

This kind of debt doesn't raise bankruptcy fraud issues the way other debt incurred prior to filing bankruptcy does. After all, who is going to file the AP? Debtor is also the creditor.

I have never heard of this kind of scenario causing problems with a bankruptcy filing (other than messing up the means test). Still, I would run it past the attorney before burning any bridges.

Another option - no idea if it would help - is to let your daughter get an educational loan in her name, but you make the payments off the record. That way you're not backed into a 13 if you can still qualify for a 7, and you're paying for her education which I recall from another thread is important to you.

EDIT: I've heard of one person who was allowed to use her 401K loan debt as a qualifying expense in a chapter 7. Her employer would not allow hardship withdrawals so if she took one, she'd lose her job. She had to see three lawyers before one of them agreed with her. She filed ch7 successfully using her 401k loan repayment as an expense. Her name was LALADY and she posted about it here.

[GHG7F0]

I'm over means as long as I am married. My marriage is not in good shape, but I haven't given up yet. As a individual I pass the chapter 7 means test and I would just take the loan after discharge. My daughter's mother and step father make about 200K, so we don't qualify for any grants etc. since she lives with them. I am going to pay for this I just need to find the best way. I make about 77K and my wife makes about 35K. Thanks for all the help...

[GHG7F0]

I get matching funds at 5% in my 401K, so this would be a loss for 5 years.

[debee]

Also, are you sure you pass the means test as an individual with 77K?

Because the median income for a household of "one" is only 48K.

[GHG7F0]

I was responding to the previous poster who stated she wasn't allowed to pay a 401K loan and make contributions. Yes I qualify as a individual, I have been to several consults and this has not been a issue. I own and condo and have 2 cars not including my wife's.

[debee]

I was responding to the previous poster who stated she wasn't allowed to pay a 401K loan and make contributions. Yes I qualify as a individual, I have been to several consults and this has not been a issue. I own and condo and have 2 cars not including my wife's.

This doesn't sound right. Did any of them run your numbers through the means test during the free consult? You can do that yourself here. Once you enter your zip and household size, the program will fill in the actual numbers that you will be allowed to use for most of your expenses. I would run the means test with one car rather than two, and only if you have a payment.

[keepsmiling]

Debee, pretty sure the OP was talking about a 13, not a 7.

[debee]

Debee, pretty sure the OP was talking about a 13, not a 7.

Yeah, he did say that in his original post, but then later he said:

As a individual I pass the chapter 7 means test and I would just take the loan after discharge...

Also, on another thread we discussed a similar issue and he was exploring his options for educational funding while filing a 7. So I had that in mind while posting here.

edit: love the funky avatar