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Can I use my 401K to pay up the bankruptcy arrears without penalty?

I am 57 yrs old and was recently laid off from my job. We were 2 1/2 years into a chapter 13 bankruptcy at the time of the layoff. I contacted our attorney and told them I planned to use the 401K and they said that would add the same amount to the bankruptcy at the end. The trustee says they don't generally do that. Otherwise they will dismiss the bankruptcy and I have to start over again. I don't want to lose my house, what do I do?

Nov 21, 2014 by Elizabeth in  |  Flag
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John Essigman Level 17

Hi Elizabeth.

So sorry for your family troubles… Although losing your home is considered a financial hardship and may allow you to take a distribution from your 401(k), it will likely still be subject to the 10% penalty and will still be a taxable distribution. Your plan may or may not allow you to take a distribution so check with your H/R Department, benefits administrator, or the custodian where the account is held. Although not the best use of retirement money, a 401(k) loan may be an option.

It sounds as if taking a distribution increases general funds available for paying down ALL debts. I am not a lawyer and would suggest that you defer these questions back to your attorney as they are in the best position to guide you.

This is a very complex and emotional issue to discuss on an open web portal. I would ask that you call my office and we can discuss alternatives as we have helped people through a similar situation…

Best wishes for a speedy recovery

Comment   |  Flag   |  Nov 24, 2014 from Cleveland, GA

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Tunc Tanin Level 10

Elizabeth, . You can't really cash your 401K while you are in chapter 13 and have the cash from 401k only apply to your your mortgage. Trustee has to follow the bankruptcy rules. Since you already lost your job and assuming you are single you may be able to convert your bankruptcy to chapter 7 or try to get your mortgage modified while continue the chapter 13 plan. If your bankruptcy lawyer is not helpful, dont hesitate to ask for second opinion from another bankruptcy lawyer. Chapter 13 has very specific rules and and there are also local rules specific to each court. It would not suprise me if each trustee in your area interprets these laws differently. An experienced chapter 13 bankruptcy in your local area can help.

View all 4 Comments   |  Flag   |  Nov 24, 2014 from Somerville, MA
Tunc Tanin

The no loan provision also applies to your family. You can't borrow from your family and complete a chapter 13 plan. The trustee wont allow that. I understand you don't want to throw away money as you are almost out of bankruptcy.

Flag |  Nov 24, 2014 near Somerville, MA
Lantis

Elizabeth, since you were laid off of work, most 401k Plans have provisions that allow you to receive a distribution or a rollover. The qualifying event is termination of employment. On the bankruptcy side of the house, if you convert to a Chapter 7 while you are in arrearage on your home, you will lose it. You may want to discuss with your Bankruptcy attorney about filing a Motion to Modify the Plan based on a change in your circumstances. I'm not sure of your location, but I have many years of experience with ERISA covered retirement plans and I have handled several bankruptcy cases in Federal court. If you need someone to review your plan document for the 401k, feel free to let me know. Best of luck.

Flag |  Nov 27, 2014 near Arlington, TX

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