Default on 401(k) loan

[pandacb]

We were short sighted and took out a big loan on my husband's 401k...the payments are only amortized over five years and are huge. We thought my job was secure...it wasn't. We are facing bankruptcy but might be able to squeek by if we could default on this loan. His employer takes the payment out of his check and they tell us we cannot default...he would have to quit his job to stop the payments....talk about cutting off your nose to spite your face! Anyway, does anybody have a words of wisdom on this subject? Thanks.

[HHM]

To what end...

If you default, you end up with a HUGE tax bill and now your husband has no job. Not exactly a good deal. Are there other debts you can discharge in BK to allow you to make this payment? A 401K loan cannot be discharged in BK, it is not really a loan; you borrowed your own money.

[pandacb]

I've read that Chapter 13 trustees ignore 401k loans and make payment plans without considering them. If you can't default on 401k to clear the money in order to make the trustee ordered payments, then what? I know this is not an issue in Chapter 7 but we have two free and clear vehicles plus a couple of collections that no one wants to buy but have value on paper.

[espo1357]

We were short sighted and took out a big loan on my husband's 401k...the payments are only amortized over five years and are huge. We thought my job was secure...it wasn't. We are facing bankruptcy but might be able to squeek by if we could default on this loan. His employer takes the payment out of his check and they tell us we cannot default...he would have to quit his job to stop the payments....talk about cutting off your nose to spite your face! Anyway, does anybody have a words of wisdom on this subject? Thanks.

Shouldn't the BK give you more room to pay your other bills?
I am confused by your post a bit.

Of course, you have to keep the job, so leaving is dumb. You may want to look into taking another 401k loan (some plan allow 2 loans up to 50k total).

Good luck.

[HHM]

I've read that Chapter 13 trustees ignore 401k loans and make payment plans without considering them. If you can't default on 401k to clear the money in order to make the trustee ordered payments, then what? I know this is not an issue in Chapter 7 but we have two free and clear vehicles plus a couple of collections that no one wants to buy but have value on paper.

That is not true, 401K loan repayments are an allowed expense.

Not really sure what you are asking or what you are looking for. 401K loans are fairly simple, you either pay or don't. If you don't pay, the loan becomes an early distribution subject to income tax and a 10% penalty.

[LALADY]

See my previous posts under my profile.

[pandacb]

I will attempt to be more clear. A year ago our income was double was it is today and then I lost my job. My husband's net is impacted by a large 401k loan repayment. Going in to a Chapter 13, his income is all we have to pay anybody with and the 401k loan repayment takes a good chunk of his net. I have read a number of posts in the Chapter 13 forum stating that trustees do not like 401k loans and feel that a person should not pay themselves when they can't pay their creditors, so they don't consider 401k loan costs in the repayment plan. On the other hand, we cannot default on the 401k without losing the job...unless somebody knows something we don't about such a default...that's what I was asking...has anybody else faced this situation?

[blessed]

So you don't qualify for Chapter 7?

[LALADY]

I am in the midst of this very issue right now.

I'm not going to repeat everything I have posted before about the topic, so finding my posts in my profile will let you know all I have had to and am going through.

I'll post an update to those threads when there is new information.

Good luck to you pandacb.

[LadyInTheRed]

I will attempt to be more clear. A year ago our income was double was it is today and then I lost my job. My husband's net is impacted by a large 401k loan repayment. Going in to a Chapter 13, his income is all we have to pay anybody with and the 401k loan repayment takes a good chunk of his net. I have read a number of posts in the Chapter 13 forum stating that trustees do not like 401k loans and feel that a person should not pay themselves when they can't pay their creditors, so they don't consider 401k loan costs in the repayment plan. On the other hand, we cannot default on the 401k without losing the job...unless somebody knows something we don't about such a default...that's what I was asking...has anybody else faced this situation?

There is no need to default on the 401k loan, even if you could. The bankruptcy code is clear that payment on your 401K loan is deductible from your income when calculating the disposible income available for your Chap 13 plan payment.

U.S. Bankruptcy Code Section 1322(f):

(f) A plan may not materially alter the terms of a loan described in section 362 (b)(19) and any amounts required to repay such loan shall not constitute “disposable income” under section 1325.

A loan described in section 362 (b)(19) is a loan from a 401k and other similar retirement plans.

Here is a link to Section 1322(f) (it contains links to the sections it refers to):

http://www.law.cornell.edu/uscode/11/1322.html

There seems to be a lot of confusion between how a 401k loan is treated in the Chap 7 means test and how it is treated in a Chap 13 payment plan calculation. Many trustees apparently do not allow you to deduct the loan payment in the Chap 7 means test and I believe a recent appellate court ruling backed them up. But the BK Code is very clear for a Chap 13.

If your loan will be paid off before the end of the plan, your plan payments will either need to be increased over the life of the plan to account for the extra disposible income after the loan is paid, or your plan would be a step plan, with your plan payments increasing after the loan is paid. You should ask your attorney if you can convert part or all of your loan payment to a plan contribution after the loan is paid.

[pandacb]

thank you, all, most sincerely.