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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 401k 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 401k 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

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