is 401k loan repayment considered a perefential payment?

[mabdella123]

Hello everybody,

I have over $600 401k loan repayment being deducted from my payroll every month. would that violate the 90 days rule?

There is a question in the statement of financial affairs schedule that asks you to:

"list all payment on loans, installment purchases of goods or services and other debts to any creditormade within 90 days immediately preceding the commencement of filing unless the aggregate value of all property that constitutes or is affected by such transfer is less than $600.

[btbeme]

11 USC section 587 has specific guidelines which require ALL to be met to be a preferential payment. Paying into a 401(k) loan does not "seem" to meet that standard.

That being said, there are two major league obstacles that stand between you and a Ch 7 No Assets discharge. First would be the Trustee or judge objecting to your situation if a $600/mo payment into your 401k loan would be better spent paying creditors. An immediate transfer to a Ch 13 would likely be ordered. Second would be a case dismissal based on "Totality of Circumstances". Neither of these is a hopeful scenario.

SO...others here with more reliable quasi-legal advice will most certainly chime in, but my instinct would be to recommend stopping those loan repayments AND figuring out how to extend your filing date until these payments are off the radar.

Surely, though, I am missing something, or may be WAAAAAAY of base...but lets see what other have to say.

[mabdella123]

those 401k loan repayments are involuntary deductions. I have to quit my job in order to stop paying. I forgot to mention I am way below the median. so even if those loans are paid off, I am still under the median income.

[despritfreya]

The loan repayments are not preferential nor are they included in means testing. However, you do list them as a payroll deduction in Schedule I. There is nothing the Trustee can say about it, other than an inquiry as to when the loans will be repaid. If repayment is done within a short period of time that may play a role in whether or not there is an abuse under the “totality of the circumstances" (11 USC 707(b)(3)), or, if you are in a 13, when your Plan payment increases.

The problem I am having is that I can't remember if this is part of the bk Code, case law (a determination that such a deduction is necessary for the support & maintenance of the debtor or the dependants of the debtor) or part of the ERISA law (some exclusion for bk purposes).

Des.

[justbroke]

While the 401(k) loan repayment is not an expense that Trustees like to see in Chapter 7, there is nothing they can do about it. The problem for the Trustee/UST is that in a Chapter 13, it is allowed. So, if they did a hypothetical Chapter 13, the payment would be allowed and the money wouldn't go to unsecured creditors.

Des, I think it's all 3 of those.

[mabdella123]

Thanks Justbroke,

I am not listing the 401k loan repayment as an expense in my chapter 7 (which is not asset case). I am way below the median income for a family of five. would it is still be a flag?

[justbroke]

It wouldn't be a flag. The only time it's questioned, in the Chapter 7 context, is when people list it as an allowable payroll deduction on Schedule I or as an expense on Schedule J.