CALL NOW!
FREE PHONE/VIRTUAL CONSULTATION

How Bankruptcy Affects a 401K Loan

Bankruptcy And 401K Tampa, Pasco, And St Petersburg Florida.Bankruptcy Affects All Aspects of Your Life, Including the Money You’ve Saved over the Years.

This is especially true if you’ve used any retirement savings, including a loan from a 401(k) plan, to help you avoid filing for bankruptcy. Sometimes, the last-ditch attempts you make to avoid filing don’t work out and you’re left dealing with a more complicated filing situation than if you’d committed to filing months or years ago.

The good news is a bankruptcy attorney can help you sort through your situation and make the most of your bankruptcy opportunity.

What do you need to know if you borrowed against your 401(k) and you’re now filing for bankruptcy?

Bankruptcy and 401(k) Savings

First, it’s important to understand how bankruptcy affects a 401(k) savings plan in general.

As long as your 401(k) is ERISA qualified, it will be protected when you file for bankruptcy. For many people filing for bankruptcy, their 401(k) savings is their biggest asset, so this protection is great news.

Furthermore, it’s not just 401(k) plans that are protected, but nearly all employer-sponsored retirement savings plans.

Your bankruptcy attorney will review your retirement savings information and discuss with you what is protected and what isn’t, but in general, you can breathe a sigh of relief when it comes to the funds you’ve saved for retirement.

For more information about bankruptcy and your retirement savings, check out this article from The Balance.

What If You Borrowed Against a 401(k) Savings Plan?

It’s possible to take out a loan against your 401(k) savings and many people who are struggling financially and trying to avoid bankruptcy do so. It’s common for someone filing for bankruptcy to have questions about a 401(k) loan.

401(k) loans are not dischargeable in bankruptcy and are not considered regular debt. In a way, you are the creditor because you’re borrowing your own money. However, you still need to repay the loan once your bankruptcy is complete.

Furthermore, you cannot use any assets liquidated in a Chapter 7 bankruptcy to repay the loan against your 401(k), nor is the loan part of your repayment plan in Chapter 13. Most of the time you are still permitted to make automatic payments toward the loan during Chapter 13, but this is determined on a case by case basis.

Continuing to repay the loan during bankruptcy allows you to keep from falling behind on your end goals for retirement, even if your 401(k) loan repayment can’t be part of the overall Chapter 13 plan.

Should You Use a 401(k) Loan to Pay Off Debt?

So is it even a good idea to use a loan against your retirement savings to pay off debt?

Probably not. Especially not if it won’t completely eliminate all of your debt.

The primary reason for this is because any money taken from your retirement savings is no longer eligible for protection under bankruptcy. The money can also be used against you when it comes to the bankruptcy MEANS test. It’s possible someone who qualified for Chapter 7 debt discharge would be unqualified based on the money borrowed from their 401(k).

It’s also important to remember that if you borrowed against your retirement savings and chose to pay off the loan right before filing for bankruptcy, your trustee could undo the transfer and use that money to pay other creditors. Repaying the loan is essentially repaying yourself and some trustees are going to view that as a lower priority debt than your other creditors.

The key to a successful bankruptcy is to understand your options and be informed enough to make the best choice based on your circumstances. The last thing you want to do is misuse your retirement savings and create lifelong problems for yourself financially.

If you have questions about your 401(k) and bankruptcy, or you have a 401(k) loan and you aren’t sure how it will be affected by bankruptcy, we can help. Contact the Law Office of Robert M. Geller at 813.254.5696 to schedule a consultation.

Archive

Tampa Bankruptcy Law Blog

Should You Pay Back What You Owe Loved Ones Before You File for Bankruptcy?

Florida Bankruptcy Laws It’s common for people who are struggling financially to turn to their friends and family for help....
Read More

Bankruptcy and Family Law: Does Filing Affect the Child Support I Pay or Receive?

Bankruptcy and Family Law If you’re like many people, the well-being of your children is your most important priority. Struggling...
Read More

5 Tips for Overcoming the Emotional Toll of Bankruptcy

Florida Bankruptcy Attorney Getting through the bankruptcy process is about more than just improving your finances. Working with a Florida...
Read More

Bankruptcy and Divorce: The Far-from-Perfect Storm

Bankruptcy and Family Law Bankruptcy and divorce separately are two of the most stressful events you can experience in your...
Read More

Does the Pandemic Have You in a Holding Pattern? Here’s How to Know When to File for COVID Bankruptcy

COVID Bankruptcy If you’re struggling to make ends meet and you feel as if your life is on hold because...
Read More

Will Your Favorite Retailer File for Business Bankruptcy in 2021?

Business Bankruptcy 2020 was a tumultuous year and many of the financial challenges caused by the pandemic are expected to...
Read More

Boosted and Extended Benefits Keeping Unemployed Afloat – But For How Long?

Unemployment Benefits Were you one of the millions of people who ended up out of a job and using unemployment...
Read More

Should Bankruptcy Laws Be Adjusted Because of COVID-19?

Bankruptcy Laws The COVID-19 pandemic brought a lot of changes throughout 2020 and many are expected to continue into 2021...
Read More

Will 2021 Bring Student Loan Forgiveness and Will It Mean a Decrease in Student Loan Debt-Related Bankruptcies?

Student Loan Debt Are you one of the millions of Americans who struggle to make ends meet every month due...
Read More

Business Bankruptcy Trends Ahead for 2021

Business Bankruptcy Trends It should come as no surprise to anyone following the economic impacts of the COVID-19 pandemic that...
Read More

Bankruptcy

For The Next 5 Days GET A FREE BOOK About Bankruptcy

Learn More

Infographics

We are A Debt Relief Agency.
We help people file for bankruptcy under the Bankruptcy Code

Pay Online Bankruptcy Courses Newsletter Subscription

NACBA Logo avvo1 avvo2 avvo3 LEA BBB Logo RG Seal

Call For A Free Initial Consultation

813.254.5696

Tampa Office

Law Offices of Robert M. Geller, P.A.
807 West Azeele Street
Tampa, FL 33606
T: (813) 254-5696
T: (800) 853-7549
F: (813) 253-3405

Map And Directions

St. Petersburg Office

Law Offices of Robert M. Geller, P.A.
125 5th Street South
(Wells Fargo Financial Center)
2nd Floor, Suite G
St. Petersburg, FL 33701
T: (727) 532-3939

Map And Directions

Pasco Office

23526 State Road 54
Lutz, FL 33559
T: (813) 336-2320

Map And Directions