Question On The "Rules To A Successful Chapter 13"

[DJC]

We are filing this week for chapter 13, it is a conversion from an unsuccessful chapter 7 filing. I was just reading in the forum about the rules to have a successful chapter 13. One of the posts mentioned being able to put money into the bank at a tune of $20 a paycheck. Another post spoke to have an emergency fund. What is a reasonable amount of money to have in a bank account for a rainy day? We received a letter from our home insurance company telling us we had to put a new roof on the house. The bids are ranging from $9,000 to $15,000, my lawyer has mentioned that I am within my right to pull the money from my 401K (I am over 60) to pay for this mandatory cost. My worry is that I take out too much to try and cover any unknown cost that might be discovered during the roof replacement. Such as sheets of plywood or rot... What happens if my final cost is a couple of thousand dollars less than what I took out of my retirement? I can't return the money to the 401 plan, do I just loose it to the trustee? Or does a trustee find some amount acceptable to have available for emergency funds? Thank you for the comments given so far.

[jange]

Hi DJC, every trustee is different, so it is hard to answer your question. Your lawyer should know how and what your trustee looks for. I did have to account for money between filing and my 341 meeting, but I also received a bonus that the trustee wanted a piece of, as my income changed. I probably wouldn't worry so much after the 341 meeting as in between, but you have a legitimate expense.

Most times you don't pay for a roof all up front. Are you limited in how much you take out of your 401K? If not, I would pull some up front to pay and then go back and pull the additional amount. You do need an emergency fund but the trustee will not allow that as an expense. So having some money in a saving account is not necessarily a bad thing. Also I believe 401K's are except from bk.

[DJC]

Thank you for the reply. I am limited to two withdraws per year. Off hand I do not see any course other than to withdraw the maximum amount the cost may be and hoping for the best.

[switch625]

Also I believe 401K's are except from bk.

I always wondered about the 401K exemption post 13 filing. I know that is is excluded in the BK petition but that also works against you if you are paying off 401K loans, which don't count as an expense to lower your DMI or as a debt that can be discharged, since those loans are not a debt under the BK code.

The general advice given by some on this board is to never, ever touch your 401k pre or post BK. I know there are the growth investment reasons (and tax implications for the withdrawal) not to do that, but i'm fuzzy on reasons not to that would related to the BK. For example, should you not do a 401K loan or hardship withdrawal because the 401k funds used post-petition lose their exemption status and the trustee would take that loan or withdrawal directly to pay the 13 plan instead of a home repair or allow the home repair, but raise the plan payment to include how much you took out of the 401K? If you did get a 401K loan, would that also require your attorney to file the Motion to Incur Debt?

Also, be sure to check your 401K for any possible restrictions for a withdrawal during an active 13. I know my 401k limits hardship withdrawals during a 13 to divorce fees or medical expenses only.

[LadyInTheRed]

I think a 401k loan is a better option than a withdrawal. I took a 401k loan to replace a totaled vehicle. My lawyer said it was fine as long as it didn't keep me from being able to make my plan payment. This is consistent with a 9th Circuit Court of Appeals ruling that payments on a 401k loan are not deductible on the Chap 7 means test as a secured debt payment because you are borrowing from yourself and you can't owe a debt to yourself. There are similar rulings in other circuits, but not at the appellate level as far as I know. If it isn't a debt for means test purposes, how can taking the loan during Chap 13 be considered incurring debt? This is my own application of a Chap 7 ruling to a Chap 13 situation. A trustee or judge might not agree with my logic. The argument against my reasoning is that if you have disposable income to afford a payment on your 401k loan, that disposable income should go to your creditors in a Chap 13.

[May2014]

We took out a 401k loan one year before filing, and the payments we make to it ARE considered an expense. I am not sure why it worked out that way because I had always heard otherwise, but I'm not going question it. We also haven't been told that our plan payments will increase when it's paid off. Again, I'm not going to bring it up! You will definitely want to seek advice from your attorney...

[LadyInTheRed]

We took out a 401k loan one year before filing, and the payments we make to it ARE considered an expense. I am not sure why it worked out that way because I had always heard otherwise, but I'm not going question it. We also haven't been told that our plan payments will increase when it's paid off. Again, I'm not going to bring it up! You will definitely want to seek advice from your attorney...

How a pre-petition 401k loan is treated within a Chap 13 plan is a different issue than obtaining a post-petition 401k loan. Section 1322(f) of the Bankruptcy Code specifically provides that payments on a 401k loan are not considered disposable income for Chapter 13 purposes. But, courts have found that that provision does not apply to the Chap 7 means test.

DJC, have you talked to your attorney about including the roof as an expense in your plan? Or do you not have enough DMI to do that?

My worry is that I take out too much to try and cover any unknown cost that might be discovered during the roof replacement. Such as sheets of plywood or rot... What happens if my final cost is a couple of thousand dollars less than what I took out of my retirement? I can't return the money to the 401 plan, do I just loose it to the trustee?

You could deposit any excess into an IRA. But, I don't know if that would really resolve the issue if the trustee thinks he/she has a right to the excess of the original withdrawal.

[DJC]

We are currently scrambling to have enough DMI, thus we have gotten permission to pay off the 401k loans by withdrawing from the 401k plan and then paying off the loans with the withdrawn money. The loss is 24% in taxes (we are paying off $38,000 in DC loans). Additionally we are refinancing the house from a 15 year to a 30 year mortgage. Fortunately there is very little change in the equity when refinancing and adds another $550 into the DMI pot for payback. Our DMI will increase in 2018 when a car (that is not crammed down) will be paid off. This will put an additional $600 into the plan as DMI.We did not want to PO our credit union with a cram down, they have been more than happy to let us refinance and have been very good to us during our BK. Given my wife's health, we may look at her retiring in 2018 and trying to keep or DMI even with what we have now. I think that bridge will have to be crossed when we get there. Our payments to the plan are $350 a month, so you can see, we are trying to make a working budget just to avoid loosing everything in a CH7. I am open to opinions on what we are trying to do. Thank you.

[LadyInTheRed]

So you have non exempt assets you are trying to keep? Your home I assume? If so, are you sure you can afford it in the long run without continuing to invade your 401k for repairs and maintenance? Or is there some other non-exempt assets?

If you qualified to cram down the car loan, the decision not to seems like a foolish one. A relationship with a credit union isn't worth that much.

[AngelinaCat]

Please explain what you mean by the term, an"unsuccessful chapter 7"

Knowing what that issue is, will help us better answer your questions.

'Hub and I were trying for a Chapter 13, but when I lost my FT job, a Chapter 13 became impossible. So we filed Chapter 7. Because we are in Florida, and Florida's exemptions are rather puny, we were ruled an 'Asset Chapter 7'. We had to pay a fee each month for 12 months to 'buy back' our non-exempt assets from the BK estate.

Our home was totally paid for and was a non issue. My car was totally paid for and old enough to be of no value. The family car was mortgaged, but we only had about ten more months to go, so we kept making the payments until done.

Does any of this ring true for you?

[DJC]

We are attempting to exempt the home that only has $40,000 equity after exemptions. The current car loan is actually 2% less than the cram down rate. We are afraid that we cannot get refinancing from the credit union if we cram the loan down.

[AngelinaCat]

Do you have 'Homestead Exemption' in Michigan? If so, how much is it? Perhaps I missed something....

[LadyInTheRed]

According to Nolo "The homestead exemption protects the equity that you have in your residence up to $37,775 (if you are over 65 or disabled the limit is $56,650)"

We are attempting to exempt the home that only has $40,000 equity after exemptions.

It sounds like DJC has $40k in non-exempt equity after applying the $37,775 or $56,650 exemption. But, the above sentence is confusing. DJC, do you mean you are attempting to keep the home (as opposed to "exempt")? When you filed Chap 7, did you think the trustee would allow you to pay off the non-exempt portion, but that didn't work? Or perhaps you undervalued the home?

[DJC]

You are correct in that we have $40k in non-exempt. I still do not get all of the terminology right. We are trying to keep the home. During the chapter 7, the trustee did state the house was undervalued the credit union had done an appraisal in the spring of 14.