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Is a 401k Distribution and/or a loan from a relative considered income for the means test calculation?

Chicago, IL |

Sadly, I'm seriously contemplating a CH7 Bankruptcy. In researching my options, I've looked at the means test & have a concern relative to the "annualization". With just my average wage income (which is the only regular income I recieve) I indeed qualify. However, given the scope of the "6 month window" they ask about - during that time I had a less than $1K (401k) Distribution/Withdrawal I had to take out & relative gave me a loan of about $3K. As such, do either of these count as income for the means test calculation? Including them creates huge non-existant income which would cause failure of the test/abuse. It seems to me from some brief research here on Avvo that these should be excluded but those Q's didn't reference this specific situation. Any thoughts? Insight most appreciated!

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Attorney answers 4


In most jurisdictions, 401K distributions are not counted as income because they are simply withdrawals from an existing asset. The loan versus gift issue needs to be sorted. If it's a gift, then probably. If a loan, probably not. If it is really a loan, then you must list the relative as a creditor. Please consult an experienced bankruptcy attorney in your area for further information.

The answers to these questions may be different depending on your individual circumstance and should not be considered as legal advice or the establishment of an attorney-client relationship.



Yes, it was indeed a loan as the relative has expectations of my paying it back as was agreed before the money was loaned... the loan was made via a cashiers check to ensure that there was proof of such a loan since we didn't formalize some sort of agreement in writing. The individual attorney who commented above you mentioned this "was it an arm's length transaction?" - I don't know what that is... what I do know is that the money from the relative was indeed a loan. Does this make any difference? With regards to the 401(k) distribution, you mentioned "most jurisdictions" and I was wondering if Chicago is indeed one of them? Out of all the responses here, you are the only BCY attorney who responded... do you serve and provide services in the Chicago locale?

Susanne Ruiz Rodriguez

Susanne Ruiz Rodriguez


An "arm's length transaction" is one like when you borrow money from a bank. It means that it is clear the transaction is a loan. So there's a written promissory note with the amount, the terms of repayment, interest, etc. The cashier's check only proves that you got X amount of $, not that it was a loan. I practice in the state of WA so I'm not familiar with the jurisdiction for Chicago. If you want an experienced bankruptcy attorney, go to and there is a directory there. You should be able to find at least a couple of attorneys in your area you can talk with. Good luck!


I agree with counsel's answer. The scrutiny will be on the transaction with the relative-was it an arm's length transaction? -and the timing of the Chapter 7 filing.

The information provided here should not be construed to be formal legal advice. The provision of this general advice does not create a lawyer-client relationship. Persons with legal questions are encouraged to seek independent counsel for advice regarding their individual legal issues.


My understanding is that a 401(k) distribution is not considered income for purposes of Chapter 7 bankruptcy. The $3000 from your relative could be considered income if it is a gift. However, if it is deemed a loan, then it is not considered income but you must list the relative as a creditor. If you are considering bankruptcy, it would be a good idea to speak with a bankruptcy attorney and make all preparations necessary for the filing.


Loans are not income. Whether or not what you received was a loan might be debatable, but if everything is properly scheduled I doubt that it would draw much scrutiny.

Even if it was considered to be income, I would be surprised if such a small amount of money would put you out of reach of a Chapter 7. There is nothing wrong with doing your own research beforehand, but at this point I think it would be best if you scheduled a free consultation with a local bankruptcy attorney.

The information provided here is intended to help you be an informed legal consumer and is not a substitute for representation by an attorney.

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