401K Car Loan after BK...how to do it

[doingpoorly]

Startingover:

Your explanation of how to state intentions to reaffirm vehicle(s) sounds reasonable. I think that it may work for me, so long as they are willing to reaffirm a LEASE. Is that possible???? Will they reaffirm a lease?

Logan:
Thank you for your thoughts on why a 401k loan is a reasonable option for post bk car loan.

Debtmonster:

You are 100% correct...cash is the way things should be done. Ideally,that is the way I would like to pay for everything (except mortgage) from now on in this new world of money and debt that we now live in.....just one glitch and it is a big one...I won't have enough money to buy a vehicle (that fits our family's needs) at the moment our vehicles will go back to the lender.
I don't want to finance a fancy bmw, I just want enough money to pay for a $3000-$5000 mini van. Fancy cars/houses/things are not what got me into this problem. I used credit responsibly for 30 years without so much as a hiccup. I always kept my debt to well below acceptable lending limit percentages, bought a house that to this day is not upside down, with a 5.35% fixed interest rate (it is appraised at current mortgage balance, and that is saying something for this part of FL) and used credit cards and paid them off within a month. I even had a 6 month emergency fund of cash that we saved for an emergency.
Then things changed..... We used our savings for an emergency. The emergency was the slowdown of construction. (The industry dh has been in his whole life) We thought were doing everything right. Then the slowdown continued and worsened, it has done this before and we rode it out every time, and made it out on the other side just fine. We thought we could ride it out again and things would get back to near normal.
I don't think anyone could have predicted what is happening right now with the economy and I don't think it is fair to paint everyone with the same brush.
Not everyone used credit irresponsibly and that is not the reason that everyone is filing bk.
If dh had lost his job or took a big paycut and things were normal in this country, we could have sold our assets, paid our bills and walked away with our credit intact, but because of the way things are now that is totally not possible. Nothing is holding its value.
About a year ago we started using our credit cards for a portion of our day to day things and not paying them off every month, still hoping things would go back to a better place. We used our paycheck to pay our mortgage, cars, utilities and cc debt and to this day we are not late on anything. We just know that treading water like this is not going to work for much longer and there is no hope of working our way out of debt at this point. We need a fresh start.
We didn't like charging basics but like everyone else I know we thought the economy would work itself out and we would be able to pay back those credit cards and we would resume our normal life. We still had hope for normal.
I now know normal, the way we knew it, is a thing of the past. It is gone and we have to find a way to do things differently. I will do things differently, I will not charge anything on a credit card for any reason again. I will live life more minimally than before. I don't think loans for vehicles/homes are evil, but will avoid them or think harder about whether a purchase of a vehicle or house is a need or a want. Wants will not be fulfilled, but in order to pay for any of our needs dh must go to work, and he needs transportation in order to do that . That brings me back to my original problem, I need a vehicle.
I will need to finance, for a short period of time, somewhere, so why not myself. That keeps the corporations from sticking it to me with unreasonable interest and dh gets to go to work and we all get to learn how to live life in a different world.

[doingpoorly]

I think he was saying that his 401k would loan him the money for 3.25% and there was a $50 set up fee. He didn't say how long the term was.



For me there will be a $70 set up fee and 3% interest for a term of 5 years. If I default on the loan or dh loses his job I will then have to pay 10% penalty.
In the worst case I will be paying 10% for the loan. I only want $5000 max so even it I default and take it as a dispersement and have to pay income tax on that, it won't increase my taxes owed based on our income and deductions.
10% or 3% is way better than I could do post bk for a car loan from a bank and I will have plenty of time to pay it back. Not that I will take 5 years to pay back $5000, I figure it will take 2 years or less.

This is how *YOUR* 401K works, Logan. It's not how most 401K early withdrawals work.

When my husband borrowed against his retirement fund, he was charged interest and he also had to pay the entire withdrawal amount + interest back into his retirement account within one year. When he wasn't able to do so, we got hit with a 10% IRS tax on the amount that was still outstanding after a year.

This is how most 401K early withdrawals work. Be glad yours was an exception....but it is the exception.

[LuciluS]

You've gotten a lot of good Ideas and Suggestions. In the end, it is Your Decision to make. It's frustrating I know as my car is paid for also.

In whatever you decide, I wish you Good Luck!

Luci

[EricaCallaha]

I have to agree with Logan...If you can borrow from yourself, $3000-5000 and only pay a $70 set-up fee and 3% interest and can pay it back in the time frame...the real question becomes...Why not?! I would. As long as you are okay with the worst case scenario, then go for it.

Good luck!

[eddiep]

If you default on the loan there will be a 10% penalty AND you will have to pay a 20% tax on the loan turned dispursment. we went through this last year, loan taken out in 2006, lost job/defaulted on loan in 2008. So I know 30% sounds bad but luckily he lost job in August, just before the stock market crashed so we lost 30% but most people lost 50% of their 401k during the crash. Just something to keep in mind.

[doingpoorly]

Isn't that 20% just withholding and you will get it back if you don't need it to pay your taxes.

That is why I said that it would only be 10% because if our income rises by $5000 our taxes won't actually increase.

I hope it is just withheld until taxes are paid. I can live with them hanging on until I pay my taxes so long as I get it back when all is said and done.

BTW- we were pretty lucky in that we moved all of our 401k money into very low risk bonds after we lost just 10% of our balance. Dh thought I was crazy and wanted to ride it out like everyone kept saying to do, but I thought it was silly to gamble like that. We had lots of "discussions" about how our money was invested. Now that he looks back he is glad I won the battle with him that time.

If you default on the loan there will be a 10% penalty AND you will have to pay a 20% tax on the loan turned dispursment. we went through this last year, loan taken out in 2006, lost job/defaulted on loan in 2008. So I know 30% sounds bad but luckily he lost job in August, just before the stock market crashed so we lost 30% but most people lost 50% of their 401k during the crash. Just something to keep in mind.

[Logan]

This is how *YOUR* 401K works, Logan. It's not how most 401K early withdrawals work.

When my husband borrowed against his retirement fund, he was charged interest and he also had to pay the entire withdrawal amount + interest back into his retirement account within one year. When he wasn't able to do so, we got hit with a 10% IRS tax on the amount that was still outstanding after a year.

This is how most 401K early withdrawals work. Be glad yours was an exception....but it is the exception.

We are not talking about early withdrawls.

Logan

[Logan]

With the economy like it is, those of you are wanting to borrow against your 401K are you 100% GUARANTEED YOU WILL KEEP YOUR JOB! If you lose it, your are SOL. Taxes, Interest, Penalties Galore.

There was someone who posted about this not too long ago who had borrowed against their 401k, filed Bankruptcy, lost their job and Trustee said the Loan was Income. I believe the last discussion was Chapter 13, which I don't believe any of us who post here want to be pushed into that.

Just Food For Thought.

Luci

This dicussion is about someone who wants to borrow from his 401K after BK. At least 7 years until the next one.

Logan

[Logan]

I think he was saying that his 401k would loan him the money for 3.25% and there was a $50 set up fee. He didn't say how long the term was.



For me there will be a $70 set up fee and 3% interest for a term of 5 years. If I default on the loan or dh loses his job I will then have to pay 10% penalty.
In the worst case I will be paying 10% for the loan. I only want $5000 max so even it I default and take it as a dispersement and have to pay income tax on that, it won't increase my taxes owed based on our income and deductions.
10% or 3% is way better than I could do post bk for a car loan from a bank and I will have plenty of time to pay it back. Not that I will take 5 years to pay back $5000, I figure it will take 2 years or less.

The term for my 401K is up to 5 years. I choosed the longest term for mine to keep the payment low and I save as much cash as I can in a checking account that gets 5% interest.


Logan

[Logan]

I have to agree with Logan...If you can borrow from yourself, $3000-5000 and only pay a $70 set-up fee and 3% interest and can pay it back in the time frame...the real question becomes...Why not?! I would. As long as you are okay with the worst case scenario, then go for it.

Good luck!

Thanks Erica. Nice to have someone who agrees.

I think most of the people who disagree in this thread are either confusing a loan versus an early withdrawl. BIG difference.

Also, if you default you WILL have penaties just like a car loan. The original thread poster has been through BK so hopefully understands any consequences and has a plan incase the Doo Doo hits the fan.

Logan

[LuciluS]

Thanks Erica. Nice to have someone who agrees.

I think most of the people who disagree in this thread are either confusing a loan versus an early withdrawl. BIG difference.

Also, if you default you WILL have penaties just like a car loan. The original thread poster has been through BK so hopefully understands any consequences and has a plan incase the Doo Doo hits the fan.

Logan

LOL! Logan. I just wanted to make sure the OP understood that IF his/her (can't remember now) loses job, automatic 10% penalty to IRS and the total amount of Loan would become taxable. OP, you are right. At the end of the year, I doubt your tax bracket would be 20% and you would probably recoup some of that 20%.


The Thought process is Great! and your right, OP has already been through Bankruptcy, so should know to have a back up plan if 'Stuff' does hit the fan

Luci

[StartingOver08]

Startingover:

Your explanation of how to state intentions to reaffirm vehicle(s) sounds reasonable. I think that it may work for me, so long as they are willing to reaffirm a LEASE. Is that possible???? Will they reaffirm a lease?
Logan:
Thank you for your thoughts on why a 401k loan is a reasonable option for post bk car loan. ....

Doingpoorly, the BK law is a little funny sometimes. It really does not matter if the lender reaffirms or not. What counts is the fact that you OFFER to reaffirm. How you offer is by putting the checkmark in the reaffirm spot on the Statement of Intentions.

I know that does not make sense, but apparently that is what allows you to do a ride through is the OFFER to reaffirm. If you actually reaffirm a vehicle, it is a whole separate document that is signed by you and the lender and filed with the court within 60 days of your filing. That is your opportunity to renegotiate with the lender if you choose to renegotiate. If not, just do the ride through until you finish the BK and then get the loan from the 401k if you choose

Just for the record, I think the 401k loan is smart in this individual case given the numbers Doingpoorly has provided. They are looking at a very small loan with small costs and little risk that will really help after the filing.

[812scoregone]

Well, if you can control your spending, its always nic to finance and build your credit back up. If you just cant control yourself, then listen to the post that said PAY CASH.

[UhOh]

Of all the bad timing for me, GMAC now has me in default. I wanted to keep the lease and pay as usual for the next 13 payments until the end of the contract. I checked the box to indicate so. My payment is due Monday the 30th and since I am in BK, they limited my account access. I am now in a bad situation.

My intention was to pay the lease as always, but they won't auto draw from my bank account now that I'm in BK. Time is too short to mail a payment and they won't give me access to do on the phone or internet.

Ugh. When it rains it pours. So now I am thinking I got some trouble and risk losing the car anyway because of a late payment.

[StartingOver08]

Talk to the GMAC BK dept to get your payment in time.

Of all the bad timing for me, GMAC now has me in default. I wanted to keep the lease and pay as usual for the next 13 payments until the end of the contract. I checked the box to indicate so. My payment is due Monday the 30th and since I am in BK, they limited my account access. I am now in a bad situation.

My intention was to pay the lease as always, but they won't auto draw from my bank account now that I'm in BK. Time is too short to mail a payment and they won't give me access to do on the phone or internet.

Ugh. When it rains it pours. So now I am thinking I got some trouble and risk losing the car anyway because of a late payment.

Are you still in the auto stay period of your BK? You can do the oldfashioned thing and overnight a check for delivery on Monday. Talk to the BK dept - a lot of times they will allow a phone payment but it has to go thru the BK dept and not the CSR's. Yes the auto draft feature is disabled when you file. You must do all your communication with the BK dept because the other reps can't talk with you now when you are in BK.