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Took a 401k Loan before filing Chp 7

Valued Contributor

Re: Took a 401k Loan before filing Chp 7

The FDIC has rules and so do the banks. I know the BIG Bank's rules from the when I was married to the first Mrs. Backwoods. If you work in a non currency handling /lending position  position   it probably  will be less stringent. As I said before my knowledge is based on over 20 years ago.   What is your bank's policy on people with "law enforncement convictions"? At one point the FDIC would not allow for anything more than a traffic ticket and there was a big flack because some applicant had a very minor charge over 30 years ago and FDIC told the bank he could not be hired. Similar logic may apply   I never kept up with this.  I would check your employer's HR department. 

Message 11 of 20
Valued Member

Re: Took a 401k Loan before filing Chp 7

 
Message 12 of 20
Regular Contributor

Re: Took a 401k Loan before filing Chp 7


Backwoods wrote:

The FDIC has rules and so do the banks. I know the BIG Bank's rules from the when I was married to the first Mrs. Backwoods. If you work in a non currency handling /lending position  position   it probably  will be less stringent. As I said before my knowledge is based on over 20 years ago.   What is your bank's policy on people with "law enforncement convictions"? At one point the FDIC would not allow for anything more than a traffic ticket and there was a big flack because some applicant had a very minor charge over 30 years ago and FDIC told the bank he could not be hired. Similar logic may apply   I never kept up with this.  I would check your employer's HR department. 


No large bank or any employer with half a brain is going to fire someone just because that someone filed bk.  Doing so is highly illegal and will expose the employer to severe sanctions.  The bank fired that person for some other "official" reason.  This is the law now and was the law 20 years ago and before that.  As one poster said, 11 USC 525(b) applies.

Des.

Message 13 of 20
Valued Member

Re: Took a 401k Loan before filing Chp 7

Well, I did end up filing on May 4th. I wasn't prepared for how emotional I was going to be afterwards, I really felt like a failure. I felt pretty bad for a good week, but now I'm ready to move on and put it behind me.

I did have a card with my employer, that they closed about 4 days after filing, and I'm still employed. So that's good news!

The school financial aid and the 401k loan did not count in my income, only work pay and child support.
Message 14 of 20
New Member

Re: Took a 401k Loan before filing Chp 7

Marie,

 

What do you mean "under" the income requirements?  I think the less income you have the better, since you can't afford to pay your bills. Right?

Message 15 of 20
Community Leader
Valued Contributor

Re: Took a 401k Loan before filing Chp 7


Adriana wrote:

Marie,

 

What do you mean "under" the income requirements?  I think the less income you have the better, since you can't afford to pay your bills. Right?


Welcome to MyFico, Adriana. When filing Chapter 7 bankruptcy there is a "means test", which varies by state, that limits how much income you can have to qualify for Ch7. If you make over that limit you can only file Chapter 13. Marie meant maximum income requirements for filing BK7, not minimum income requirement.

 

I missed this thread when Marie started it, I'm not an attorney or a CPA, just someone who went through BK7 in 2010. I'm surprised no one raised the obvious issue here: It's my understanding that if you have an outstanding loan from your 401k/IRA when you file BK7 that loan must be treated like all other debt. Meaning you cannot repay it, that would be preferential treatment of one lender over others. The loan would be discharged like all other debts, and the 401k plan would have to convert the amount discharged to a withdrawal, subject to 10% penalty if under age 59 1/2, plus have to declare it as taxable income.

 

Most states have generous exemptions for retirement accounts, meaning they are exempt from being seized to repay debts. If filing BK is even a remote possibility the last thing you want to do is withdraw funds from a retirement account, either through a loan or early withdrawal. I discharged over $150k of debt in my BK7, counting my non-reaffirmed mortgage I'm still current on, but got to keep nearly $50k in retirement accounts. And Arizona is far from being the most generous state for exemptions when filing BK7. The AZ exemption for 1 only personal vehicle is $5k, my 2003 SUV, paid for Free & clear, was worth just under $5k in 2010, so I got to keep that as well. I still have it, I just don't drive it often as I have a newer car, the 2003 SUV is like me, old & tired. Smiley Wink


Fico 08: 720/721/719 TU/EX/EQ
Message 16 of 20
New Member

Re: Took a 401k Loan before filing Chp 7

Thanks for replying Dave. I made the terrible mistake of taking a loan from my 401 because I thought I could pay my debts down. I am 3 months discharged ch 7 and though I am grateful that the cc debt is gone I am still left paying myself back every month, knowing that that could've been money in the bank. I am still living paycheck to paycheck (apt rent too high) I wonder if I can turn the loan into a withdrawal just to provide immediate relief.
Message 17 of 20
Established Contributor

Re: Took a 401k Loan before filing Chp 7

401k loans follow the same rules in BK as a student loan ( can't discharge it or pay it preferentially) - you can convert to a hardship withdrawal after discharge if your plan allows it
Message 18 of 20
Regular Contributor

Re: Took a 401k Loan before filing Chp 7


TygerHawke wrote:
401k loans follow the same rules in BK as a student loan ( can't discharge it or pay it preferentially) - you can convert to a hardship withdrawal after discharge if your plan allows it

Folks,

 

Please be careful with what you post, especially if you do not know the law.  If someone were to follow the advice above, that person may end up with a huge tax bill. 

 

For the record, loans taken out against ERISA qualified plans ARE NOT treated like student loans or any other loan for that matter.  Payment on such loans are a requirement under Federal law and are not otherwise impacted by the filing of a bankruptcy.  There is a ton of info on this if you Google "401(k) loans and bankruptcy" with much of the info coming from web sites of consumer bk attnys.

 

Des.

 

 

 

 

 

 

 

 

Message 19 of 20
Established Contributor

Re: Took a 401k Loan before filing Chp 7


despritfreya wrote:

TygerHawke wrote:
401k loans follow the same rules in BK as a student loan ( can't discharge it or pay it preferentially) - you can convert to a hardship withdrawal after discharge if your plan allows it

Folks,

 

Please be careful with what you post, especially if you do not know the law.  If someone were to follow the advice above, that person may end up with a huge tax bill. 

 

For the record, loans taken out against ERISA qualified plans ARE NOT treated like student loans or any other loan for that matter.  Payment on such loans are a requirement under Federal law and are not otherwise impacted by the filing of a bankruptcy.  There is a ton of info on this if you Google "401(k) loans and bankruptcy" with much of the info coming from web sites of consumer bk attnys.

 

Des.

  

 

 


Of couse you would end up with a huge tax bill - that's what taking a hardship withdrawal from a 401k does, whether a BK is involved or not.  I was simply confirming that:

 

1. 401k loans are not discharged in BK, just like student loans are not, and

2. the rules of your 401k plan apply whether a BK is involved or not.

 

I am not a lawyer, but I did carry both a 401k loan and a student loan through my own BK.  I still have both, but I could convert my 401k loan into a withdrawal at any time, just like I could have before my BK.  I choose not to because of the aforementioned tax bill  Smiley Wink

 

I stand by every word of my previous post.

Message 20 of 20