401K loan repayment Ch 7 vs. Ch 13

[Sherri]

We may not be able to file Ch 7 due to a 401k loan repayment that is a significant part of our monthly expenses. Lawyer says we may be forced into a Ch 13, so I've been reading up on that. Knowing that these questions will also be run by our lawyer (we're currently in "regroup mode", long story...), maybe some of you can shed some light on these questions:

I know 401k repayments aren't allowed in Ch 7. From what I've read on here, the US Code for Ch 13 is very specific that a Ch 13 plan may not change the loan terms for repayment of a 401k loan, and funds required to make those payments will not be considered "disposable income".

So what happens if we are forced to go the Ch 13 route and taking into consideration our expenses (including the 401k repayment), there is nothing left over at the end of the month to repay creditors? We were able to exempt a lot of items in Ch 7, will the same thing hold true in Ch 13 or will they force us to sell our house or our car?

After many months of heartburn and anxiety making this decision, then finding an attorney we were comfortable with, and being far enough into the process that we had the meeting where we were going to sign to file, being satisfied that we were going to be able to keep everything... now we're back at square one and I have no idea what to expect if we have to do Ch 13.

What a mess.... thanks for any input you have.

[HHM]

I don't believe there is much variation among districts about this issue, but if the ONLY thing you have that would push you into a chapter 13 is a 401K loan repayment, then you can stay in chapter 7. The only issue you run into with that is if the 401(k) loan would be paid off during the chapter 13 plan. Then conceivably the US trustee could argue that you pay $10 per month until the 401K loan is repaid, then start paying DMI into the plan, but I have not seen the trustee make that argument in my district.

You really shouldn't have to do a chapter 13 over this.

But, to put your mind at ease, chapter 13 is not about losing your assets, in fact, it is easier to keep things in chapter 13 than in 7, so don't worry about that. Chapter 13's are all about your disposable income.

[Sherri]

Hmmmm... in my multi-tasking frenzy, I replied to you, HHM, but my reply seems to have gone off to Never Never Land....

At the risk of double posting this, our income is over the median. When the paralegal ran our numbers for the Ch 7 with the 401k loan included and compared to our income, we had a negative balance. Take away the 401k payment, and we have several hundred dollars left over at the end of the month. When we were sitting there a week ago we were like deer in the headlights, all set to sign for Ch 7 but our paralegal made a couple of missteps which landed us where we are now.

[IamOld]

Hmmmm... in my multi-tasking frenzy, I replied to you, HHM, but my reply seems to have gone off to Never Never Land....

At the risk of double posting this, our income is over the median. When the paralegal ran our numbers for the Ch 7 with the 401k loan included and compared to our income, we had a negative balance. Take away the 401k payment, and we have several hundred dollars left over at the end of the month. When we were sitting there a week ago we were like deer in the headlights, all set to sign for Ch 7 but our paralegal made a couple of missteps which landed us where we are now.

I think HHM's advice is always spot on! For whatever it's worth, I'm in the same boat - meeting with lawyer next week to sort out 13 v 7, spouse files, me files, what not. And we've got a suit/courtdate at the end of the month.

BEST WISHES TO YOU!!!! Let us know how it turns out...

[Sherri]

Good luck to you, too, IamOld!

[HHM]

Like I said, you should be okay unless the US Trustee is very aggressive, of course, it doesn't help that you are over median. What needs to happen in these situation is that your other expenses need to be aggressively high, but within reason. The attack on these types of cases does not come from the 401(k) overage, but from the US Trustee banging down other expenses on your schedules so that even with the 401(k) loan repayment, you still have DMI. It is pretty well settled that if you would be a chapter 7 but for a 401(k) loan repayment that can be taken as an expense in chapter 13, you stay chapter 7. Reason being, you can't have a zero payment chapter 13.