Question on using severance to pay 401K loan before filing?

[JRScott]

Its okay hub

Just glad we get Pizza the right info Sometimes I'm wrong too but I was pretty sure on this one.

[walkthaplank]

You are dealing with a very large amount of money with large repercussions to go along with it. The only answer that matters, the only answer you should listen to on this topic is what your lawyer has to say. You are paying them to help you protect what assets you do have. Doing the wrong thing here will cost you in ways you probably cannot even think of.

Go over this with your lawyer.

[Pizza]

You are dealing with a very large amount of money with large repercussions to go along with it. The only answer that matters, the only answer you should listen to on this topic is what your lawyer has to say. You are paying them to help you protect what assets you do have. Doing the wrong thing here will cost you in ways you probably cannot even think of.

Go over this with your lawyer.

Actually, it's not a lot of money that I'm dealing with, it was a $5000 loan which I owed $2000 on, the tax liability at 30% would be $600. I'll ask a lawyer about it, but reading more into the plan itself, it's probably too late to avoid the tax penalty (you get 60 days to repay).

Now rolling over the 401k is something totally different that I need to look into, because I could still protect some of my income. For that, I really do need to ask a lawyer. That said, without any 401k payments considered at all, I still pass the means test.

[tdawg]

I recently was laid off from my job. I have a 401K loan for about $30K. I have severance coming which will be (after taxes) about $35K. I am wanting to pay the 401K loan back before I file as if I don't it will mean that I am going to receive that as a "distribution" which I assume will be looked at as income and certainly will cause me to pay taxes and possibly penalties (I am over 55 and 401K regs say that if you are over 55 and leave a job, you don't pay the penalties).

My question is, how would this loan repayment, essentially to myself as it is put back in the 401K, be viewed upon filing either a 7 or a 13?

If anyone can answer this question, I would love to hear the answer.

It's probably too late for this jim since you posted this a month or so ago, but I'm curious (and in a similar situation, but with a much smaller 401k loan $4,200 and severance pay $15k). In my situation, I will be laid off Oct. 31, and will get the severance pay a couple weeks after that.

What I'm wondering if what if you file chapter 7 BEFORE you get the severance pay? I know you'll have to list it on the schedule I in section 17 that you are expecting to get that money. But then, how would that be treated? Would it be treated as an asset? Would it be treated as expected income? If you are being laid off, and your income will drop dramatically to just unemployment (mine will drop to 1/3 of what it is currently), then I wouldn't think they would be too aggressive on wanting to take my severance pay. But, in Washington state, the exemption on income is 75%. So, does that mean that in the worst case, they'd take 25% of the $15k = $3,750? Then I'd have the rest (minus taxes), and I could pay off the 401k loan after filing (after the 341 if necessary)?

[jimnbene]

After coming back and reading all the answers, I guess it will be interesting to find out what happens.

I did repay the loan and it was a large amount > $30K. Took most of the money from the severance / retention bonus.

I can only hope that I find out that it is not a big deal, but that time will come soon enough. We will be find an attorney and doing a consultation in the next couple of weeks.

I will come back and post the advice that I get from the attorneys that we do consult.

Thanks for all the input.