Payback of 401k loan

[AreSoonParted]

I currently have a 401k loan outstanding. I am still several months away from filing a bk. I have a big tax refund coming, and am expecting a bonus in April.
Does anyone know, or have experience with paying off a 401k loan in a big chunk prior to filing a bk? or is that considered preferential treatment of a creditor? I know an outstanding balance of a 401k loan is converted to a
401k withdraw when filing, so I'd like to get this down as low as possible.

Trying to dig myself out of debt, I probably just dug myself deeper in!
What a total drag!

Thanks for any feedback.

[SinkingFast]

This will be interesting to see what others might say.

On the one hand, you're basically wanting to convert a non Exempt asset, cash, into an Exempt asset, your 401k/Retirement. Which is expressly protected under the New Law.

But, is repaying a 401K Loan considered a Preferential Payment??!! Is paying yourself the same as paying an Insider or an excess amount to one Unsecured Creditor over others??

Hummm.........

[lrprn]

But, is repaying a 401K Loan considered a Preferential Payment??!! Is paying yourself the same as paying an Insider or an excess amount to one Unsecured Creditor over others??

Hummm.........

You've raised quite an interesting question here, ASP. Hopefully someone who is consulting with their bk lawyer in the next few days can slip this question in and come back with a real legal interpretation for us.

[HHM]

I would reason that since the 401K loan is NOT a loan for BK purposes, I don't think paying it back would be a preferential payment. Generally, there is nothing wrong with taking non-exempt assets (in this case, cash on hand) and turning them into exempt assets prior to BK. (you do get in trouble if you transfer assets out of your name prior to BK, but generally, you are allowed to take full advantage of exemptions). Moreover, paying back your 401K is not objectively unreasonable, after all, by doing so, you are keeping yourself from incurring new debt (i.e. tax penalties, etc).

I think you will be Ok, but with something this important, you probably want to get a lawyers opinion on the issue.

[aa06a47]

I currently have a 401k loan outstanding. I am still several months away from filing a bk. I have a big tax refund coming, and am expecting a bonus in April.
Does anyone know, or have experience with paying off a 401k loan in a big chunk prior to filing a bk? or is that considered preferential treatment of a creditor? I know an outstanding balance of a 401k loan is converted to a
401k withdraw when filing, so I'd like to get this down as low as possible.

Trying to dig myself out of debt, I probably just dug myself deeper in!
What a total drag!

Thanks for any feedback.

NOTE: A 401K LOAN is not converted to a 401k withdrawal when filing. Only if you chose to not pay the loan back is it considered a withdrawal and taxable. Under the new law, 401k loans are allowed to be paid back and the montly payment does not count as disposible income as it was under the old law. This is a good change in the bk code for anybody with 401k loans. In fact, a 401k loan payment could actually benifit you if your on the ledge between a chapter 7 and chapter 13...the same as any secured debt such as home and car.

If filing BK is unavoidable, I would use the money you get from tax returns and bonus to make any necessary repairs to your home. Pre-bk planning must be considered especially if your getting a good amount of money a few months before filing bk. Be careful though that if audited, you can proove where the money went.

Also, the bonus your talking about will be used to calculate disposible income in the means test if it comes in the 6 month period prior to filing bankruptcy. Since your in the chapter 7 area, I assume you expect to file chapter 7. If it is going to be a hugh amount, you should look if it will throw you in the chapter 13 area.

[IN-DEBT]

401k

What aa06a47 stated is what our attorney and trustee both told us. This was the only good thing that came out of the new laws our attorney stated.

I had two 401k loans and was really nervous that I would have to pay a huge tax bill as the old system seemed to force some people into a withdrawl which has huge tax consequences and a 10% penalty. I was so glad to find out this had changed.

I still fear that this will change during my plan. I hope not.

[AreSoonParted]

RE: Payback of 401k loan

Thanks for the feedback. That is a real load off my mind. I found a few items in the BK books that refer to that, but I'm glad I got something more definite.

I'm still on the Ch13/Ch7 fence. My company has come out of chapter11 BK and since my pension is trashed, many benefits gone, etc....we've gotten several unexpected bonuses over the past year. That's the only thing that's keeping me going. I keep waiting for the 6 mos to pass and the "found money" to roll out of the income window,....and wham another few thousand to push me high enough over the limit. This has made pre BK planning difficult.
We're still a few months away, but I'll keep the list posted.

Thanks again

[aa06a47]

You can ask your employeer to defer any bonus you might be getting. Big shots do it all the time to get better tax consequences. Of course, if your dealing with a bk company, a bird in hand is better than 3 in a bush.

[CATCHMEIFYOUCAN]

401k Payback

[B]I currently have a 401k loan outstanding. I am still several months away from filing a bk. I have a big tax refund coming, and am expecting a bonus in April.
Does anyone know, or have experience with paying off a 401k loan in a big chunk prior to filing a bk? or is that considered preferential treatment of a creditor? I know an outstanding balance of a 401k loan is converted to a
401k withdraw when filing, so I'd like to get this down as low as possible.
Trying to dig myself out of debt, I probably just dug myself deeper in!
What a total drag!

Just my 2 cents and hope I'm not too late chiming in here! I had 2 401k plans due to 2 full time jobs, I owed on loans on both! They ate up a good chunk of my disposable income plus additional amount I was deducting besides the loan to save money (we're taking almost $600 to my 401k that the Trustee didn't blink an eye going into my 401k plans), so if you can help it I wouldn't pay off that 401k ! Whatever monie(s) you got coming, yeah, use it towards necessary "unexpected expenses!"

Best of Luck, Catchmeifyoucan