Can I take out my 401k loan to pay off the remaining chapter 14 bankruptcy ?
4 attorney answers
It is hard to add anything after Attorney Gottlieb's full accurate statements addressing your question. I simply add that each Bankruptcy District has its own rules, and the Order of Confirmation and the Plan itself must be looked at to see if you must file a motion or not to incur new debt during your case: some Districts you do like mine (except car debt that our Trustee authorizes in an exception), some you do not. Thus, look at your docs, and discuss with your attorney, discuss the options, then act on your informed decision on what you want! Good luck and thanks for asking and hope you tell Attorney Gottlieb how much you really do appreciate his time in his answer.
You can do it, but it likely involves getting court permission to take out the loan. The court will very likely grant that request.
However, I ask you to consider not doing this. A 401k is for your retirement. Each time you borrow from it, you deprive yourself of the returns you can make on the money. Assuming you are invested in a stock mutual fund, historical returns are in the 7-10% range.
Another issue is that the loan will be due in full should you lose your job (or quit) before you pay off the loan. If you don't pay it off when the job ends, you will be subject to the taxes due on the money plus a penalty. I know you want to get out of your Chapter 13 fast. However, good financial decisions require patience. You can work extra jobs to pay off your case early rather than borrowing from your 401k.
Be sure to run any plans by your attorney. It may not be beneficial in some cases to make extra payments or pay off a case early.
Please note this is to be considered general advice and not legal advice about any particular situation. The answering of any question does not...
The direct answer to your question is "Yes", you can take out a 401(k) "loan" in order to pay off your Chapter 13 Plan. The more important question however is "why"? Everything that I'm about to say is general in nature, and you should speak with your attorney assisting you with your Chapter 13 case (or, if not, speak to a competent bankruptcy attorney in your locale) to review your case before taking any action.
Unless your Chapter 13 plan proposes to pay general unsecured creditors 100% in full, I would not generally recommend taking out a 401(k) loan to pay it off prematurely. The real benefit of a 401(k) retirement plan (particularly a 401(k) that provides matching funds from the employer) can only be seen if one takes into account the impact of "compounding", whether in the form of compound interest or the reinvesting of stock/mutual fund dividends, over an extended period of time. By comparison, a Chapter 13 bankruptcy case can be viewed as the analog of a "debt consolidation loan", on terms that you would likely never be able to obtain through a real, actual lender. This is even more the case where the dividend which the general unsecured creditors is **less than ** 100% in full. Discounting for the moment the cost of this "debt consolidation loan" analog (in the form of the Chapter 13 trustee's commission on dividends paid to creditors), what you are effectively receiving via the bankruptcy process amounts to a 0.00% (or much less for a less than 100% dividend Chapter 13 Plan) 3- to 5-year loan on a balance that is equal to **all** of your pre-petition debts ***COMBINED***.
If you pay all of this loan using proceeds from your 401(k) retirement plan, you are, in effect, limiting the amount of "compounding" (again, in the form of accumulated interest and stock/mutual fund dividends) in exchange for paying off a zero- (or even less than zero-) cost loan.
If the reason that you are seeking to pay off your Chapter 13 plan early, is because you feel that the Chapter 13 plan payments have become too burdensome because of the change in your economic circumstances (for example, a post-petition job loss, illness, loss of overtime, etc.), the **appropriate** thing to do is to seek an amendment of the Plan under Section 1329 of the Bankruptcy Code, to lower the plan payments, reduce the dividend rate and/or extend the plan term. A Chapter 13 Plan is not (and was never meant to be) some sort of judicially-administered "suicide pact".
Therefore, before taking any further action to apply for a 401(k) loan, I would ***STRONGLY*** urge you to speak with your Chapter 13 attorney or, if you don't have one, retain a competent bankruptcy lawyer (that is, a lawyer well-versed in Chapter 13 practice in your judicial district) for a consultation to review your circumstances. To the extent that it costs to you anything to do so, considerate money very well spent indeed! I wish to the very best of luck in your future endeavors! My best regards to you and yours! I remain…
Very truly yours,
Attorney Richard N. Gottlieb
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First issue is whether you have been in your 13 long enough to finish without paying off every single claim filed by all creditors, as many 13s do not plan on doing that. You would need to file a motion seeking Court permission to take the loan and payoff your 13. It is probably not a good idea, as the money in your 401 should be sitting there and appreciating for your retirement. Under no circumstances do you do anything until you have Court permission to incur debt.