Free Consultation
The office is open as per the NYS Covid-19 guidelines. We are now doing both in-person and telephone consultations. Please call the office at 718-855-6840 to schedule a time to speak with one of our experienced bankruptcy attorneys.

401K Loan, Bankruptcy: What you should know

If you’re thinking of filing for bankruptcy in New York and you previously took out a 401(k) loan, what should you be aware of?

First, it depends upon whether you’re going to file for Chapter 7 or Chapter 13 bankruptcy.  (And that’s a question to discuss with your experienced bankruptcy attorney in New York.)  In a Chapter 7 filing, the means test expense calculation does not include a 401(k) loan. Bankruptcy law stipulates that you must pass the means test to be eligible to file. Without being able to list the loan as an expense, it increases the likelihood that you will fail the means test and therefore not eligible to file for bankruptcy under Chapter 7.

Ironically, in a Chapter 13 bankruptcy case, the 401(k) does factor into the means test.  Specifically with regard to calculating how much income you have above the median income so that you can figure out how much you have to pay to creditors in your payment plan.  Payments on a 401(k) are counted as expenses (just like food is) in this way in a Chapter 13 case.  And they work in your favor by reducing the amount of income available to pay to creditors, which in turn makes it more likely that your payments to creditors will be a little lower.

An important takeaway from this is that you should always make sure to let your bankruptcy attorney know about all of your expenses.  Just like with tax accounting, the more your attorney knows, the better they will be able to help you and make sure that you get the full benefit of the bankruptcy code.

This is also a good opportunity to point out that 401(k) accounts are protected from creditors in the event of a bankruptcy filing.  So the best strategy is really to not take money out of your 401(k).  Or at least not until after your bankruptcy case is completed.  But if you do have to take money out, then it certainly helps to know how it will affect your case.

If you have questions about any deferred compensation plan, a 401(k) loan, and bankruptcy please feel free to contact Bruce Weiner, an experienced New York bankruptcy lawyer in Brooklyn, for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

Recent Posts

Beware Grace Periods, Debtors

Too often, debtors see grace periods offered by lenders as free benefits. “Grace” makes it sound so innocent. However, debtors who routinely rely on grace periods when making payments will find themselves facing financial difficulties that might lead to bankruptcy. The reason is that although creditors offer grace periods to debtors, they also use them

Read More »

Bankruptcy May Not Rescue You From Vicious Personal Disputes

Bankruptcy is a technical process that assumes everyone working within it is mostly rational. To the extent that it expects parties to deviate from irrational behavior, the Bankruptcy Code and its accompanying rules include incentives to keep parties in line. Creditors are usually large and impersonal, and they rarely care if their debtors file bankruptcy.

Read More »

Non-Lawyers’ Explanations of Bankruptcy May Be Wrong

Do you have financial problems? Do you tend to ask your friends for advice? Is one of your friends an experienced New York bankruptcy lawyer who will explain the process for you? Are your friends otherwise knowledgeable people? The answer to these questions may be, “Yes but you don’t know it.” Although many bankruptcy lawyers

Read More »

6 Steps to Take Before Filing Bankruptcy

Leaving your case to an experienced New York bankruptcy lawyer is not the only step on the to-do list before filing bankruptcy. There are many things debtors should do (and not do) before they file, and the more organized and mindful debtors are, the easier the process will be and the more effective the result.

Read More »

Social Security Number Not Necessary for Bankruptcy

A question that’s commonly asked about New York bankruptcy is whether a debtor needs a Social Security number to file. Debtors ask because they sometimes run across the bankruptcy form title, “Your Statement About Your Social Security Numbers” (B 121), which asks debtors to list their current and prior Social Security numbers. The new bankruptcy

Read More »

How Can a Debtor (or Creditor) Get a New Trustee?

The trustee in a New York bankruptcy case is usually not the debtor’s ally. His or her purpose is mainly to administer the bankruptcy estate or ensure the debtor’s repayment plan goes according to plan. Trustees pursue preference payments, fraudulent conveyances, and other malfeasance committed by debtors. They frequently initiate adversary proceedings against debtors. In

Read More »
Scroll to Top