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.

401(k) or IRA Loans in Chapter 13: Bad Idea

New York bankruptcy debtors often have retirement accounts, investment retirement accounts (IRAs) and 401(k) plans with their employers, and they regularly consider depleting those accounts to pay off creditors rather than file bankruptcy. One feature that tempts debtors into doing this is the ability to take out loans against their retirement accounts. Essentially, they are borrowing money from their future retirement to pay for past borrowing—and in a way that avoids paying tax and early withdrawal penalties. A while ago I explained why 401(k) loans can put New Yorkers deeper into debt. The biggest reason not to do it is that New York bankruptcy exempts just about all of debtors’ retirement savings.

So that takes care of pre-bankruptcy retirement-account loans, but what about these loans during bankruptcy? By that I mean: 401(k) or IRA loans debtors take out while in a confirmed chapter 13 repayment plan.

The answer is that debtors in chapter 13 should not borrow money from a retirement account without consulting with their New York bankruptcy lawyer. Chapter 13 bars debtors from incurring new debts while they are making payments on their plans, which makes sense because all of debtors’ discretionary incomes should be directed toward the plan payments anyway and they should have no income left to repay the new 401(k) loan. If a trustee or a creditor finds out about a 401(k) loan, then they will initiate an adversary proceeding against the debtors to declare the loan income that should go to the creditors. The consequences can be dismissal of the chapter 13 case.

Usually a 401(k) loan indicates that the debtor is running into difficulties in the chapter 13 plan, or has suffered a sudden event like an emergency that makes the plan more difficult to complete. When these underlying circumstances are present, then the debtor is better off asking the bankruptcy court to modify the repayment plan, convert it to chapter 7, or ask for a hardship discharge. In these circumstances the debtor keeps the money in the retirement account after bankruptcy.

However, there can be situations in which a 401(k) loan is preferable to these options. For instance, if a debtor is nearing the end of the repayment plan and needs some money to pay for another expense, then the court and the creditors might allow it, and it might be preferable to the alternatives outlined above.

If you are running into financial difficulties whether before or during bankruptcy, then talk to an experienced New York bankruptcy lawyer before touching your retirement accounts.

For answers to more questions about retirement accounts in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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