First post, post chapter 7 discharge question.

[joeyw]

Hi long time lurker, first post. Thanks to all for the excellant information which helped me make some good decisions.
My chapter 7 should be discharged any day. I hope. Last Friday was my sixty day post 341. No activity on pacer except that the mortgage company lifted the stay and foreclosed, which is fine, we already have moved to an affordable apartment. No more albatrosses around my neck. Now for the question. In my work a reliable car is a requirement, I do qc for a construction company and am required to use my personal car to travel through the day, often driving upwards of fifty miles or more beteween jobsites during the day. My current car has over 210k miles and is on its way out. I have an approved loan ready to go, just need the bk discharge paper. It's at 19.6%. My other option is to take a loan on my 401k for 3.1% and the interest gets paid back into the 401k. I now live frugally within my means, and the loan will not be a stretch (I am looking at a base model sub-compact) now that the other debts are gone. My main question is if my bk is discharged but not yet closed, will I be doing something illegal or "wrong" by taking either loan out. The 410k loan would come to me and I would pay the dealer, meaning there will be no lein on the car, versus the other loan which will be a high interest but otherwise conventional car loan.

[btbeme]

If you were a no asset case, it is likely a matter of days before your case closes. Give it a week and see.

Although the 401(k) loan looks cheaper, it is also very easy to skip a payment or two and therefore incur a big tax liability. Do a 401(k) loan only if you are 101% positive you could pay it back no matter what happens. A conventional car loan would likely show up (in a positive fashion) on your credit report. But, money is money - calculate the full cost of the car loan vs the full cost of the 401(k) loan including the possible tax liability.

[AngelinaCat]

Welcome to the forum.

No you would not be doing anything wrong. As long as you can manage the payments, you should do fine. I just urge you to leave the 401k alone. It is too easy for something to happen that you can't pay that loan back, and then you get a tax penalty. That was one of our many problems.

You didn't say if you were an Asset case, or a No Asset case. If you are a No Asset case, the close will likely come very soon after your discharge--perhaps the same day. If you are an Asset case, it could take several months for your case to close while the trustee is administering your estate.

Good wishes to you!

[walkthaplank]

Actually the 401k loan would probably be better for you, and here is why. Would your 401k loan be deducted from your payroll? If so, you can't miss your payment unless you are terminated, at that point you will incur a tax liability for the remaining unpaid portion. That liability shrinks with every payment and it is ultimately just a percentage of the amount (a big percentage yes, but not the whole amount). Calculate the cost of the standard loan at 19.6% and the loan at 3.1%. Since you think you can handle the cost of the 19.6% loan without any issue, make the terms of your 401k loan so that it is a similar payment for a much shorter duration limiting your tax liability exposure. What people are forgetting here is that you are going to have more exposure on the consumer auto loan if you can't handle the payments and you get behind. You would end up with a repo'd car (not having a car), a repossession on your credit report post BK AND be liable for any remaining balance, penalties/fees and interest for which the creditor could easily get a judgement and start garnishing your wages.

While it may seem attractive to start rebuilding your credit with this car loan, think about how much that loan is going to cost you. Just a quick calculation at $10k would be 60 payments of $262.72 at 19.6% vs 48 payments of $221.79 at 3.1%. That ends up being $15,763.20 vs $10,645.92 over the life of the loan. If you are able to bump it up another $30 a month to $291.25 you could cut that down to 36 months for a total loan of $10,485.00. That is a serious expense in order to rebuild your credit. Now lets look at the tax exposure. I don't know what your state taxes are where you are, but with a worst case scenario where you would be unable to repay ANY of the 401k loan, you would be looking at an additional $10,000 in income along with 10% federal penalties, in my state it would be 10% state penalty and than that $10k amount would be taxed as income. Worst case scenario, we'll call that roughly 30% (most likely much less). Ballpark you would be looking at a total exposure of $15k, or about the same as the cost of the consumer loan if you paid it in full according to the terms. You would also have time to put that money together and if you couldn't, you would have to negotiate with the IRS and state tax board a payment plan. Every payment you make to your 401k loan diminishes that exposure and even if you defaulted on the loan, you still have a car with no repossession on your post BK credit report.

If you want to start rebuilding your credit, get a credit card spend very little and pay it off religiously, better yet, get a secured credit card spend very little and pay it off religiously. The consumer car loan is going to be your new albatross around your neck. Good luck however you proceed!