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Bankruptcy AttorneysAre 401k loans in bankruptcy treated the same way as other unsecured loans or debt?

The short answer is no.  A 401k Plan is more like an investment and savings account combined.  Essentially you are putting your own money into an account to save for retirement.  Some companies will provide the extra benefit of adding a certain percentage or matching your contribution to the account dollar for dollar.  This is an added perk.  Gone are the days of companies providing a straight retirement plan for their employees.  To cut costs, employers no longer provide retirement plans.  Instead they offer the 401k benefit.  Although it costs companies less to fund 401k accounts, there is the possible benefit that the investments in the 401k plan can go up with the market.  On the other hand, there is also a risk that the market will drop.  For example, when the economy took a turn for the worst, many employees lost thousands and even hundreds of thousands of dollars.

If it is not a debt what is a 401k loan in bankruptcy?

The 401k plan itself is an asset.  It is property that is worth money.  The good news when it comes to bankruptcy, is that your 401k, like other retirement plans, is untouchable.  The trustees that handle the bankruptcy case cannot cash out your 401k to pay your debts.  If the 401k account is like a savings account, then the 401k loan is money that you borrow from yourself.  This is why the 401k loan is not dischargeable.  The theory is that you can just cash out the plan.  Yes you will have to pay the penalties and taxes if you cash the plan early.  However, unfortunate as it sounds, this does not concern the bankruptcy court.

How does the 401k loan affect a Chapter 13 bankruptcy?

Although 401k loans are not dischargeable in a Chapter 7, it may help you in a Chapter 13.  In the Central District of California, the Courts will allow you to take the 401k loan as a necessary expense.  This will have the affect of reducing your plan payments.  For example, if you are paying $200 a month towards your 401k loan, then you can reduce your Chapter 13 plan payments by $200 for the entire period of the plan payment or until the 401k loan is paid off, whichever comes first.  The other advantage of this is that you are using that $200 to pay yourself back and reinvest in your retirement, rather than paying back your unsecured creditors.

For more information on 401k loans, Chapter 7, Chapter 13 or other debt options, contact our Orange County, Los Angeles and Riverside bankruptcy attorneys at Tran Bankruptcy Law