Why do folks dip into their 401K/IRA's before filing for BK?

[HHM]

401K loans are not real loans, you have borrowed money from yourself. And under the rules for 401K, the loan must be repaid, and if not, the loan becomes an early withdraw subject to tax and penalties.

Luckily, for the Means Test, you can deduct the 401(k) loan payments as an expense.

[LadyInTheRed]

But that loan went into the coffers of the credit card, right, the debt of which would have been discharged in BK. Or since you did a Chapter 13, you basically would have had to pay it off in any case?

You just had to tarnish my silver lining!

Between the time I took the loan and the time I filed the BK, yes I threw away the money. But, during my plan, if I weren't paying off the loan, my plan payment would have increased by the amount of the loan payment and I'd be paying more to my unsecured creditors.

[LadyInTheRed]

401K loans are not real loans, you have borrowed money from yourself.

Yep. I had to educate one of the attorney's I consulted with on that fact. She thought it was a secured debt. She did the research and emailed me by the time I got back to work telling me I was correct. She originally thought I'd easily qualify for a 7. Nope.

[JackBondLove]

401K loans are not real loans, you have borrowed money from yourself. And under the rules for 401K, the loan must be repaid, and if not, the loan becomes an early withdraw subject to tax and penalties.

Luckily, for the Means Test, you can deduct the 401(k) loan payments as an expense.

An interesting question ...

Would paying off a 401K loan on the eve of BK with remaining cash (i.e., that could be going to the BK estate) be considered a preferential payment, or some other type of "hindrance"?

[JackBondLove]

Retirement accounts are completely exempted from confiscation in the BK. Is it that folks think that they can avoid BK and think that BK is so bad that it should be avoided at all costs? Is it just simply that folks just don't know? Do folks just fold under the pressure from the collection agents?


Is that true? I was under the thought that it depended on when you put the money into the account. so If you put the money into the IRA on Monday and Tuesday you decided to file for BK that could be a problem. did I misunderstood?

Generally, states have some limit on how little before the BK filing that 401K/IRA contributions are considered as non-exempt. I believe in Louisiana it is 1 year - and my trustee did ask me if I had made any contributions, to which I answered him, not in the last 6 years!

[spidge]

One nice side effect to paying off a 401K loan while in BK13 is that your already accustomed to making the payment, so one can start adding back into the plan using the normal deduction. At least in my case it has worked that way. I can now put in less than my after tax payment that I was used to making anyway and gain the company match. So 6%(me)+3%(company match)+5-7$(once a year profit share)=14-16%. That should do well in time.

Back to the thread topic.

Ignorance, Pride, and refusing to give up are my main reasons. I sincerely thought I could overcome the hurdles.

I am sooo amazed at the idea that I was brought up to pay back what you borrow and treat people respectfully and their property like you treasure it yourself. Yet in the corporate world we are expected to cut our losses and throw people and other companies(those we owe) to the wolves in order to save ourselves. Even though most of the issues are self inflicted.

Am I guiltless, depends how you measure it.

[HHM]

An interesting question ...

Would paying off a 401K loan on the eve of BK with remaining cash (i.e., that could be going to the BK estate) be considered a preferential payment, or some other type of "hindrance"?

Not likely. I suppose it really depends on the amounts we are talking about and the source of the funds used to pay back the 401(k) loan, but strictly speaking, I don't think such an action would be considered a "preference", instead, they would just look at standard "bad faith" analysis regarding dissipation of non-exempt assets prior to BK.

For example, let's say you netted out $40,000 from your 401(k), only spent $5K and wised up and decided to file BK, so you paid back the 401(k) with the remaining $35K, that would be okay (at least IMO).
However, if you took out a $10,000 401(k) loan, and then paid it back using a cash advance from a credit card and then filed BK, that would be bad.

[LadyInTheRed]

I am sooo amazed at the idea that I was brought up to pay back what you borrow and treat people respectfully and their property like you treasure it yourself. Yet in the corporate world we are expected to cut our losses and throw people and other companies(those we owe) to the wolves in order to save ourselves. Even though most of the issues are self inflicted.

Am I guiltless, depends how you measure it.

The way I see it is that Bank of America, Citibank and Chase extended credit to me and took a certain risk. They extended a lot more credit to me than I actually used. It is unbelievable how much more I could have charged. They calculate their risks and take losses. They know they will still profit in the end. It's all business. They don't care about me. I haven't thrown anyone to the wolves. They ARE the wolves. Not that I blame them for the mess I got myself into. But, if they were willing to work with me to lower payments, I probably would have continued to work all my life to pay them and eventually die in debt. I have not disrespected anyone. I have enough respect for my creditors to know that they know what they are risking every time they extend credit.

ETA: I don't consider these big banks "people". I have paid back every individual I have ever borrowed money from. I always will.

[spidge]

The way I see it is that Bank of America, Citibank and Chase extended credit to me and took a certain risk. They extended a lot more credit to me than I actually used. It is unbelievable how much more I could have charged. They calculate their risks and take losses. They know they will still profit in the end. It's all business. They don't care about me. I haven't thrown anyone to the wolves. They ARE the wolves. Not that I blame them for the mess I got myself into. But, if they were willing to work with me to lower payments, I probably would have continued to work all my life to pay them and eventually die in debt. I have not disrespected anyone. I have enough respect for my creditors to know that they know what they are risking every time they extend credit.

ETA: I don't consider these big banks "people". I have paid back every individual I have ever borrowed money from. I always will.

I'm with you on this, don't misunderstand. Its just amazing that the little guy(individuals) are pressured into believing that BK is bad where corporations use it as a tool. That is how I look at it now.

[Diesel73L]

I'm with you on this, don't misunderstand. Its just amazing that the little guy(individuals) are pressured into believing that BK is bad where corporations use it as a tool. That is how I look at it now.

If not for this forum I might have ended up as one of those folks. I, like many, used to believe that BK was for deadbeats and all of that nonsense. Then the big banks imploded the economy, took their handouts, and went right on with their lives like nothing happened. I'm trapped in a deadend job as a result (can't find anything that pays better) and my wife is losing her job as a teacher due to budget cuts. Breaking it to my parents will be tough I think, but even though I always tried to hide our financial difficulties from them they are starting to see how hard things are for us. They had some rough times in the 1980s but did well in the boom years of the 1990s and early 2000s. My dad is retired with a good pension, my mom is well established at a company that has weathered the downturn very well, etc... I think they'll eventually realize that my wife and I, having graduated from college in 2006 and buying our first home in 2008 were almost doomed from the start. It will take a lot to correct all of the misinformation that fills their heads, just as it did with me reading post after post on this forum. Ultimately though, they'll understand (as my wife and I do) that the only way to give their granddaughter a future at this point is to start over again. My wife's parents on the other hand are a different story-they know about our financial troubles and they've been advising us NOT to go through BK because they had such a horrible experience. Again though, in researching here, I now realize it was because of poor planning on their part, and no behavior change post BK. They are nearly back where they were 20 years ago. I am determined that will NOT be us.

[spidge]

If not for this forum I might have ended up as one of those folks. I, like many, used to believe that BK was for deadbeats and all of that nonsense. Then the big banks imploded the economy, took their handouts, and went right on with their lives like nothing happened. I'm trapped in a deadend job as a result (can't find anything that pays better) and my wife is losing her job as a teacher due to budget cuts. Breaking it to my parents will be tough I think, but even though I always tried to hide our financial difficulties from them they are starting to see how hard things are for us. They had some rough times in the 1980s but did well in the boom years of the 1990s and early 2000s. My dad is retired with a good pension, my mom is well established at a company that has weathered the downturn very well, etc... I think they'll eventually realize that my wife and I, having graduated from college in 2006 and buying our first home in 2008 were almost doomed from the start. It will take a lot to correct all of the misinformation that fills their heads, just as it did with me reading post after post on this forum. Ultimately though, they'll understand (as my wife and I do) that the only way to give their granddaughter a future at this point is to start over again. My wife's parents on the other hand are a different story-they know about our financial troubles and they've been advising us NOT to go through BK because they had such a horrible experience. Again though, in researching here, I now realize it was because of poor planning on their part, and no behavior change post BK. They are nearly back where they were 20 years ago. I am determined that will NOT be us.

I love the passion in your tone. You write with a sense of determination. Sharing with both parents was easy as mine are gone and hers had filed before too. They could not understand most of what I was attempting to relay for our BK13, but when I told them the final goal they were on board.
It did take us some time to finally file and with all the preparation an schooling on this site we are in good order. Life is much better while in our BK13 that it had been in the past 15 years, so I can only imagine life after discharge.

Good luck to you and yours.

[mountanddo]

I would file for Chapter 7, only dipping into those accounts AFTER filing. It seems to me that everyone in a "negative cash flow position" should know this.

Why would you need to dip into your 401k AFTER filing?