QUESTION
Can my 401k loan be covered in the bankruptcy?
Asked on Jun 01st, 2012 on Bankruptcy - California
More details to this question:
I have a family of 5, and my wife and I gross approximately $55,000 annually. We don't have cash to file bankruptcy, but need to in order to avoid a wage garnishment. Can I borrow or make a withdrawal from my 401k to pay the BK/attorney fees to file?
19 ANSWERS
Daniel James Wilson
Yes.
Answered on May 29th, 2013 at 2:58 AM
Domestic Relations Attorney serving Huntsville, AL
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Ferguson & Ferguson
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There should be no reason why you can't borrow from your 401k to get your attorney's fees. You are basically just borrowing from yourself and it has to be paid back.
Answered on Jul 05th, 2012 at 7:02 PM
Bankruptcy Law Attorney serving Austin, TX
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Law Office of Susan G. Taylor
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Yes, if your company allows.
Answered on Jul 05th, 2012 at 5:07 PM
Immigration Attorney serving Arlington, TX
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Law Office of Pho Ethan Tran, PLLC
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Yes. You can withdraw money from the 401k to pay for your expenses but the money loses its exemption status once it has been withdrawn from the account. Any money left in the account will remain exempt from the bankruptcy estate.
Answered on Jul 05th, 2012 at 5:06 PM
Bankruptcy Attorney serving Phoenix, AZ
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Law Office of D. L. Drain, P.A.
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Most likely yes. You are very smart to use a bankruptcy attorney. Most people do not understand that bankruptcy is a very complicated process. It is wise to talk to an experienced bankruptcy attorney before deciding to take this important step. Most Arizona bankruptcy attorneys offer a free consultation about the basics of bankruptcy.
Answered on Jul 03rd, 2012 at 5:34 PM
Criminal Defense Attorney serving Deltona, FL
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R. Jason de Groot, P.A.
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Your 401 is exempt from the claims of creditors. You are the head of a family and any garnishment of your wages can be dissolved if you file the right papers. It appears that you would qualify for a chapter 7 bankruptcy. You can read about it in a pamphlet at my website. You could borrow from yourself to py the attorneys fees for a bankruptcy and the filing fee of $306.
Answered on Jul 03rd, 2012 at 12:55 PM
Yes. You can borrow funds to pay for your bankruptcy fees. The loan will not be discharged in bankruptcy court. There are tax consequences.
Answered on Jul 03rd, 2012 at 12:53 PM
Family Law Attorney serving Hackensack, NJ
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The Law Offices of Stuart Jon Bierman
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I think the answer is "yes" because you are borrowing from yourself and the transaction is for a necessary and time-sensitive expense in view of the wage garnishment.
Answered on Jul 03rd, 2012 at 12:52 PM
Burton J. Green
In Florida your 401K money is exempt property as long as it remains in the 401k account. The bankruptcy court does not have a claim to that money. Your bankruptcy will not prevent you from borrowing against the 401k. You withdraw the money to pay your bankruptcy attorney. This is something you should discuss with the attorney you intend to hire.
Answered on Jul 03rd, 2012 at 12:12 PM
No and yes. The 401(k) loan is not covered by the bankruptcy. It is not really a loan. It is already your money. When you take out a 401(k) "loan" what you are doing is making a temporary withdrawal that does not have the usual bad news effects of a regular withdrawal. Normally, when you withdraw from a 401(k) you pay a penalty, unless you are > 59.5 years and you pay income tax on the money no matter how old you are. When you "borrow" from your 401(k) you don't have to pay taxes or penalties but when you pay it back you don't get the tax deduction you would normally get when you contribute to the 401(k). The reason the loan is not covered is because it is not really a loan. If you don't continue to pay back a 401(k) loan, then you lose the special tax advantages of the loan and it just becomes a withdrawal with penalties and taxes and it's all retroactive to when the loan was first made. It's big-time yuck. Most 401(k) plans do not let you withdraw money as long as you still work for the employer and are eligible to make new contributions. You can take out a new 401(k) loan to pay your attorney if your plan allows you to do so. Most plans have a limit of how much you can borrow or how many loans you can have out at one time or the total amount you can borrow or all three. But there is no bankruptcy law that prohibits it.
Answered on Jul 03rd, 2012 at 12:05 PM
Bankruptcy Law Attorney serving Madison Heights, MI
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Able Legal Services, PLC
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Yes, you can borrow from your 401k to pay the attorney. However, I hope you are not paying to much.
Answered on Jul 03rd, 2012 at 11:44 AM
Criminal Law Attorney serving Fremont, CA
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Steven J. Alpers, A Professional Corporation
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Contact the administrator for your 401k program and tell them it is a financial emergency.
Answered on Jul 02nd, 2012 at 5:59 PM
Yes. The bankruptcy code specifically protects 401(k) funds and loans. The 401(k) loan is not a loan in the traditional sense. Since you paying yourself back, the loan is not dischargeable. You will still need to pay yourself back or take it as a taxable distribution.
Answered on Jul 02nd, 2012 at 4:39 PM
Dear Family of Five, When someone asks whether a thing or loan is "covered," they are usually asking whether the loan is discharged, or if the thing referenced is an asset, they are asking whether the asset is exempt, or protected, from being taken by a creditor or trustee in bankruptcy. Money in a 401k is an asset; however you referenced having taking a loan out of it. Thus, I am not sure whether you are asking if the 401k is protected as an asset or whether a loan you take from it is dischargeable. I will answer both. First, as long as your 401k administrator allows you to take a loan against it, you may do so in order to pay your attorney fee or other living expenses. I caution you against taking out too much prior to filing bankruptcy, because the funds in are, for the most part, not exempt under Nevada exemptions as cash or in your bank account on the day your file bankruptcy. Currently in Nevada, money held in personal retirement accounts is exempt from execution for an amount up to $500,000.00 (see NRS 21.090(r). 401k accounts have been recognized as such a personal retirement account. To see whether you qualify for Nevada's exemptions, you should see an attorney. The bankruptcy code does not allow for a discharge of a loan "owed to a pension, profit-sharing, stock bonus, or other plan established under section 401, 403, 408, 408A, 414, 457, or 501(c) of the Internal Revenue Code of 198611." (U.S.C 523(a)(18)). Thus, since your loan is from your 401k, which is essentially a loan to yourself, you cannot discharge it. On the other hand you may be able to take an early withdrawal with penalties if you are under retirement age according to the IRS.
Answered on Jul 02nd, 2012 at 4:07 PM
Bankruptcy Attorney serving Grand Rapids, MI
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David Andersen & Associates, PC
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You can borrow from your 401K or withdraw from your 401K to file bankruptcy. The loan is often a better option because 401K distributions can sometimes be deemed as income which could cause problems depending on the timing of your bankruptcy. Of course, a 401K loan from yourself will be discharged in the bankruptcy and will still be owed afterwards.
Answered on Jul 02nd, 2012 at 3:43 PM
Yes, retirement accounts are generally exempt from the bankruptcy estate. You may borrow against your 401k although you cannot discharge that loan; you are basically borrowing from yourself.
Answered on Jul 02nd, 2012 at 3:25 PM
It's a last resort option, but people do sometimes borrow from a 401(k) loan to get the money needed to file bankruptcy.
Answered on Jun 22nd, 2012 at 2:22 PM
Bankruptcy Attorney serving Washington, DC
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Law Offices of Diann C. Moseley
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Yes
Answered on Jun 22nd, 2012 at 2:07 PM
Bankruptcy Attorney serving Concord, CA
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William Rubendall Attorney at Law
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You can borrow or make a withdrawal from your 401K to pay fees to a bankruptcy attorney.
Answered on Jun 22nd, 2012 at 12:42 PM