The Pros and Cons of 401k loans in bankruptcy
Video Transcribed: Edward Kelley with 188 Debt-line here answering your bankruptcy questions. And we are in episode four of our five part series on special debts and bankruptcies. Taking a look at the different kinds of debts that may or may not be dischargeable in your bankruptcy that you should be aware of.
So, today we’re going to talk about 401K loans. This comes up a lot in my practice. So many of you and many debtors in the interest of trying to get your finances together may take a loan out through your employer against your 401K. Now, a 401K mind you is generally considered exempt in a bankruptcy as long as it’s set up properly, meaning the trustee cannot take it in your bankruptcy.
However, you yourself may have taken a loan out against it and received monies that have long since been spent when you filed the bankruptcy. You may wonder, “Well, will that get rid of that debt?” And the answer is a definite no. And unfortunately another consequence…
So, generally when you do a 401K loan, you’re having the loan payment withdrawn from your paycheck to be paid back to the employer on a monthly basis or biweekly or whenever your checks come out. That amount cannot be generally deducted as an expense in terms of qualifying for chapter seven or in terms of lowering your disposable income in a chapter 13.
Those of you that have been following these understand what that means, if not, refer back to my video on chapter 13 basics and chapter seven basics. So kind of a double whammy. You can’t get rid of the 401K debt and you can’t deduct the payments that you are making back on it from your disposable income. So just be aware if you have that kind of debt, you’re going to have to pay it back and you will also not be able to use that to your advantage in the bankruptcy.
So, generally most people are still going to qualify for a seven if that’s the only out of the ordinary circumstance that they have. And essentially you’re basically paying back your own money anyway.
So, that’s all we’re going to cover today, 401K loans, or I should say in a more general sense, tax advantage, retirement program loans, which are generally exempt. Those debts are not dischargeable and not deductible from your disposable income. So, stay tuned, 188 Debt-line. We’re going to finish up this series in the next episode with an overview of special debts. See you then.
And as always, you can email me at email@example.com with your specific questions give us a call, 188 Debt-line.