topic Re: Took a 401k Loan before filing Chp 7 in Bankruptcy

Took a 401k Loan before filing Chp 7

marie1981 — Mon, 24 Apr 2017 00:16:09 GMT

Hello,

I'm interested in filing Chapter 7 bankruptcy on about 45,000 of unsecured debt. I am current on all of my bills and mortgage/ car payments, but have been juggling to pay them all. I have already met with an attorney for a consultation and he stated I am under the income requirements for the Chapter 7 in Texas.

My concern is that I took out a 401K Loan in February of this year for $6,000 to try and pay off bills. I am making the payments through automatic payroll deductions, also I’m not allowed to not contribute to my 401K (1% contribution). I work for a very big bank.

My question is, does this $6,000 deposit count towards my income since it was in the last 6 months? I would think it does and might make me closer to the limit and I would have to do the means test. Also what about Financial Aid payments from Pell grants, do those count as income well? I received $1,100 in January this year.

Thanks for any help you can provide.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Mon, 24 Apr 2017 00:20:08 GMT

@marie1981 wrote:
Hello,

I'm interested in filing Chapter 7 bankruptcy on about 45,000 of unsecured debt. I am current on all of my bills and mortgage/ car payments, but have been juggling to pay them all. I have already met with an attorney for a consultation and he stated I am under the income requirements for the Chapter 7 in Texas.

My concern is that I took out a 401K Loan in February of this year for $6,000 to try and pay off bills. I am making the payments through automatic payroll deductions, also I’m not allowed to not contribute to my 401K (1% contribution). I work for a very big bank.

My question is, does this $6,000 deposit count towards my income since it was in the last 6 months? I would think it does and might make me closer to the limit and I would have to do the means test. Also what about Financial Aid payments from Pell grants, do those count as income well? I received $1,100 in January this year.

Thanks for any help you can provide.

The loan is not income because you are expected to pay it back; had you taken a distribution that would be another story. Pell grants on the other hand are regular taxable income.

Good Luck!

Re: Took a 401k Loan before filing Chp 7

marie1981 — Mon, 24 Apr 2017 01:05:51 GMT

Thanks for your insight!

@Anonymous wrote:
@marie1981 wrote:
Hello,

I'm interested in filing Chapter 7 bankruptcy on about 45,000 of unsecured debt. I am current on all of my bills and mortgage/ car payments, but have been juggling to pay them all. I have already met with an attorney for a consultation and he stated I am under the income requirements for the Chapter 7 in Texas.

My concern is that I took out a 401K Loan in February of this year for $6,000 to try and pay off bills. I am making the payments through automatic payroll deductions, also I’m not allowed to not contribute to my 401K (1% contribution). I work for a very big bank.

My question is, does this $6,000 deposit count towards my income since it was in the last 6 months? I would think it does and might make me closer to the limit and I would have to do the means test. Also what about Financial Aid payments from Pell grants, do those count as income well? I received $1,100 in January this year.

Thanks for any help you can provide.
The loan is not income because you are expected to pay it back; had you taken a distribution that would be another story. Pell grants on the other hand are regular taxable income.

Good Luck!

Re: Took a 401k Loan before filing Chp 7

Anonymous — Mon, 24 Apr 2017 14:46:53 GMT

@marie1981 wrote:
Hello,

I'm interested in filing Chapter 7 bankruptcy on about 45,000 of unsecured debt. I am current on all of my bills and mortgage/ car payments, but have been juggling to pay them all. I have already met with an attorney for a consultation and he stated I am under the income requirements for the Chapter 7 in Texas.

My concern is that I took out a 401K Loan in February of this year for $6,000 to try and pay off bills. I am making the payments through automatic payroll deductions, also I’m not allowed to not contribute to my 401K (1% contribution). I work for a very big bank.

My question is, does this $6,000 deposit count towards my income since it was in the last 6 months? I would think it does and might make me closer to the limit and I would have to do the means test. Also what about Financial Aid payments from Pell grants, do those count as income well? I received $1,100 in January this year.

Thanks for any help you can provide.

Why not?

Re: Took a 401k Loan before filing Chp 7

marie1981 — Mon, 24 Apr 2017 15:05:59 GMT

When I first got hired I had 31 days to opt out of retirement savings and I never did. That was 15 years ago. Now if i try to remove it, I dont have the option, the only option is minimum 1%. It's prob user error, I need to call HR and see how. 😊

Re: Took a 401k Loan before filing Chp 7

srloring13 — Mon, 24 Apr 2017 17:01:43 GMT

Some 401K plans do not allow contributions if there is an outstanding 401K loan. That could be the reason marie1981 is not allowed to contribute.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Mon, 24 Apr 2017 18:38:37 GMT

@srloring13 wrote:
Some 401K plans do not allow contributions if there is an outstanding 401K loan. That could be the reason marie1981 is not allowed to contribute.

That would suck. Hell the amount I contribute any small amount I owe, I could pay back the loan in a couple of months if that were the case.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Tue, 25 Apr 2017 01:19:34 GMT

At some (I don't know about all) filing for bk is automatic termination. The first Mrs, Backwoods was a Manager for Big Bank and fired some one for this. This may have changed as the first Mrs. Bankwoods and I have not spoken in over 20 years. The bank said they were a risk. Be careful

Re: Took a 401k Loan before filing Chp 7

Anonymous — Tue, 25 Apr 2017 12:59:53 GMT

@Anonymous wrote:
At some (I don't know about all) filing for bk is automatic termination. The first Mrs, Backwoods was a Manager for Big Bank and fired some one for this. This may have changed as the first Mrs. Bankwoods and I have not spoken in over 20 years. The bank said they were a risk. Be careful

This is generally the case when one works for any job that is financial and handles sensitive information e.g. customers SSN access etc. I thought I might not get an offer once for a job because of my BK13 and the company I had applied for (which handled retirement funds/plans).

Re: Took a 401k Loan before filing Chp 7

marie1981 — Tue, 25 Apr 2017 13:37:20 GMT

So does this law below not apply? I work for a large bank but I don't do anything with customers or their information. I work in computer systems.

Section 525 of the Bankruptcy Code (11 U.S.C. 525) states:

(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act, or an individual associated with such debtor or bankrupt, solely because such debtor or bankrupt--

(1) is or has been a debtor under this title or a debtor or bankrupt under the Bankruptcy Act;
(2) has been insolvent before the commencement of a case under this title or during the case but before the grant or denial of a discharge; or
(3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Bankruptcy Act.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Tue, 25 Apr 2017 13:51:29 GMT

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.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Thu, 18 May 2017 09:38:16 GMT

Re: Took a 401k Loan before filing Chp 7

despritfreya — Thu, 18 May 2017 11:49:09 GMT

@Anonymous 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.

Re: Took a 401k Loan before filing Chp 7

marie1981 — Fri, 19 May 2017 13:18:51 GMT

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.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Wed, 19 Jul 2017 14:09:44 GMT

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?

Re: Took a 401k Loan before filing Chp 7

DaveInAZ — Wed, 19 Jul 2017 16:02:28 GMT

@Anonymous 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.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Wed, 19 Jul 2017 18:28:26 GMT

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.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Thu, 20 Jul 2017 01:01:06 GMT

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

Re: Took a 401k Loan before filing Chp 7

despritfreya — Thu, 20 Jul 2017 01:38:24 GMT

@Anonymous 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.

Re: Took a 401k Loan before filing Chp 7

Anonymous — Fri, 21 Jul 2017 02:12:15 GMT

@despritfreya wrote:
@Anonymous 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

I stand by every word of my previous post.