November 12, 2010

401K Loan & Bankruptcy

Posted in Bankruptcy, Uncategorized tagged at 10:33 am by demetriagraves

If you have a 401k loan and are considering bankruptcy here is a brief outline of what generally happens to your 401k loan. Basically a 401k loan allows you to borrow money from your 401k funds and repay it over a certain amount of time. In order to get a 401k loan, you do not have to have a credit check, and you do not need to have a certain income level. Even though it is referred to as a 401k loan, creditors do not necessarily consider it a loan. Because you are basically borrowing money from yourself with this type of loan. This means that you will still have the 401k loan even if you go through bankruptcy.

A 401k is an employer sponsored retirement plan and is generally exempt from bankruptcy. If you have a 401k loan, you have actually borrowed against your own 401k retirement account. This kind of loan is quite popular because it is easy to get, there is no need for a credit check and the interest rate is low. Filling out an application is easy and if you look at it, the interest you would be paying for the loan would actually go to yourself.

If you are unable to repay a 401k loan as per schedule, it will be automatically seen as a withdrawal from your retirement account and you will be taxed accordingly and you will be charged an additional 10 percent of the unpaid amount as penalty if you are less than 59 ½ years of age.

Therefore, if you are considering bankruptcy, unpaid 401k loans may cause problems because they are not seen as debts and cannot be forgiven. However, the monthly payments may be exempted from the means test computations for disposable income in bankruptcy.

This computation is employed to determine if your income is sufficiently low to qualify you for a Chapter 7 bankruptcy. What this means is that the unpaid monthly amounts for your 401k loan that are considered for tax purposes as your income need not be included when calculating your disposable income to test whether you can file for Chapter 7. If your income is less than the median income for your state, then you are automatically qualified to file for Chapter 7.

When considering filing for bankruptcy there are many factors that need to be taken into account. This is why it’s important to seek the advice of a qualified attorney who is experienced in dealing with bankruptcy. I offer a free confidential initial consultation where you can get all you questions answered so you can determine if filing for bankruptcy is the best option for you.

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