Newbie From AZ with 401K Loan Questions

[doudis2]

[justbroke]

1) I took a 401K loan for about $19K back in August of this year. This was a survival loan until things got better (long story). Anyway they did not get better. So now that I will need to file CH 7 my lawyer is just not sure about the 401K.

Your lawyer isn't "sure" about the 401(k) loan? Anyhow, the 401(k) loan repayment will probably not be an allowed expense for the purpose of calculating your eligibility (Means Test) for a Chapter 7.

a. He does not think it will count as income towards my median computation (after he checked around), but he does not seem confident. What do you guys think?

It probably won't count as income (as many Districts are starting to build caselaw on this topic). I'm not sure for Arizona, but your lawyer should be able to ask around.

b. Regardless of the consequences I am saving hard to pay it back before I file as I am not going to let them take it when I was trying to "do the right thing."

Take what? Are you telling me that this $19K is sitting in the bank somewhere!!!! Now that in an of itself will be problematic. You converted an exempt asset into a (probably) non-exempt asset. If it's sitting in your bank, you could have issues. You may need to pay back that loan, but you really need to have a good attorney who understands asset protection in Arizona. While I've never heard of it, there could be preference issues since a 401(k) loan is unsecured. This is why I'll say, again, that an attorney who knows asset protection and how to put the money back without causing issues, may well be worth the consult!

My 401K plan forces me to put it all back or nothing. I should be able to get it back in there in mid January (didn't use too much of it before I saw the writing on the wall).

OUCH!

My lawyer thinks I should wait 4 months before I file so as they may call it a contribution, but says 6 would be better. Sure I would wait a year if I could, but as you all know this is not up to me (can we all say it together BROKE)! I just stopped paying the mortgage this month and I can sustain at CC's a couple more at most (all maxed).

Sounds like a plan.

Suspend all disbelief... common sense is not required in dealing with the Bankruptcy Court(s)!!!

Then it would be a taxed/penalized distribution. It was not a distribution so how could it be income? I took money from one pocket and put it in another really. Now I want to put it back so I can free up the money they are taking out of my check. Plus I would hate to give it to the CC shysters when I file.

Your tax problem does not mysteriously change the net affect of you paying that (unsecured) 401(k) loan over your creditors.

How long would you wait to file after putting the money back? Do you think I'm heading towards a fraud ruling or something?

Can't tell, there isn't a whole lot of caselaw on the subject. The recent 9th Circuit (California) case may provide some guidance. They determined that a 401(k) loan is not a debt or creditor (since you're paying yourself). This could cut both ways.

The Code protects 401(k) loan repayments in the Chapter 13 context. Taking $19K of money and putting it into a 401(k) before filing... will probably raise a few eyebrows. An eager Trustee may see that juicy $19K and yell avoidance! (Some of them do this no matter what, just to see if you'll settle.)

There was one Judge in California who stated that transfers (from non-exempt to exempt) made on the eve of bankruptcy, may raise suspicions.

It's very interesting though.

[Flamingo]

Brieifly and in black and white here is what you did:

Took out $19,000 out of your pre-tax withheld 401(k) account. Spent some, have some left. So the balance of that $19,000 is sitting somewhere as an asset which if not paid back to your 401(k) account and the loan closed, would become taxable income to you as a distribution. The issue is what are the consequences of you paying back that portion of the $19,000 to your 401(k) account in order to file Chapter 7? The timing and possibly the amount of the withdrawal are the problems. You could be asked for any trnsfers in or out of any accounts for one year prior to filing (we were) and you would have to report this.

I would consult with a better attorney in your state who can better advise you on this cause you could be sitting on a big can of worms with that transaction. Best of luck to you!

[albacore44]

Ok. i know something about this. This could help you depending on your circumstances. I took a $45k 401k loan 2 years ago, and paid off some of my CC's. Yeah stupid, i know. It was before i found this forum, and before i admitted to myself that I was in deep doo-doo. my intent was to try and pay off all my CC's and avoid BK. wrong. Ok, so as JB stated, you can not include that loan payment in your expenses on the means test for a CH-7. but....it can help you in a CH-13 as it is included as an expense in your budget, so it will lessen the amount you would pay into the plan. you should really consult with a good attorney in your area.If it were me, I would delay filing, spend that chunk of money on living expenses, pay your Attorney with some of it, and keep a paper trail on how it was spent.

[Flamingo]

Albacore - I actually worked with someone who resembles the photo in your Avatar years ago - she was in our accounting section. LOL!!!!!

[albacore44]

Albacore - I actually worked with someone who resembles the photo in your Avatar years ago - she was in our accounting section. LOL!!!!!

i thought you looked Familiar.

[doudis2]

[creditguy]

I can relate to your 401K situation. Before I filed Ch. 7 my wife had a 401K loan out to finance defending a 3 year mechanics foreclosure lawsuit. Just days before the lawsuit was going to go to trial the other side decided to settle with us for over $100K. I discussed the situation with my attorney (firm was one of the best in the area) and was told by him to repay the 401k loan and pay off the second mortgage on the house since we were going to keep the property after I filed personally without her.
Well I repaid the 401K and the second note. A month or two later I revisted him prior to filing. All the sudden he had a concern about the 401k loan repayment since I was repaying my wifes loan and not a 401K of mine (like he said he thought was happening). He thought the Trustee may seek to get those funds since it would be a preferential payment just months before filing.
My choices were limited since I had a business failure after 20 years and a limited time window to file 7. I did not want to file 13. So I went ahead and filed anyway and told him we would deal with the $45K loan later if needed.
I searched case law on the subject and think I may have an argument if it comes up but so far it has not.
The thing is I disclosed it in the schedules therefore no fraud or abuse was raised. I had my 341 meeting and not a single question was asked about it (and my Trustee likes taking casesall the way to the Supreme Court). OVER 60 days later and there was no objection to discharge and my case is still shown as a no asset case even though I have a $10K tax refund and Harley waiting dispostition. I expect my discharge papers this week.


As far as the well issue for you I do not see how that would be a problem. My attorney encouraged me to make house repairs as part of myplan to get rid of cash and I did. Surely having clean water delivered to your house would not be an abuse!

Good luck!