by: Baran Bulkat, Attorney
If you have filed for bankruptcy, when you can take out a laon from your 401k retirement fund depends on whether you filed for Chapter 7 or Chapter 13 bankruptcy. Read on to learn more about whether you can take out a 401k loan after bankruptcy.
For more information on what happens after bankruptcy, see our Life After Bankruptcy topic area.
If you filed for Chapter 7 bankruptcy, you can technically take out a 401k loan anytime after filing your case. ERISA qualified 401k plans are not considered property of the bankruptcy estate. This means that the Chapter 7 bankruptcy trustee can’t go after that money to pay your debts.
However, the money is only safe if it is in your 401k account when you filed your case. If you take out a 401k loan prior to filing for bankruptcy and put that money in the bank or use it to buy another asset (such as a car), the trustee can take it unless it is exempt. In general, it is a good idea to wait until you receive your discharge and your case is closed before taking out a 401k loan. This protects you against any unforeseen complications (such as dismissal) that can arise.
To learn more about how to use exemptions to protect your property in bankruptcy, see our Bankruptcy Exemptions topic.
In Chapter 13 bankruptcy, you pay back a portion of your debts through a three- to five-year repayment plan. Your plan payment depends largely on your income and expenses. If you want to take out a 401k loan during Chapter 13 bankruptcy, you will need to obtain court permission first. Because the 401k loan will create an additional expense (and may be viewed as income), it can affect your repayment plan.
Whether the court will approve your 401k loan and if it will affect your repayment plan depends on the particular circumstances of your case. It's a good idea to talk to a knowledgeable bankruptcy attorney before taking out a 401k loan during Chapter 13 bankruptcy.
In addition to how a 401k loan may affect your bankruptcy, there are other considerations you should take into account. While a 401k loan can be an easy and convenient way to obtain money, it also has many drawbacks.
When you take out a 401k loan, that money no longer earns a return. Also, not paying back your loan can result in heavy penalties and negative tax consequences. Consider talking to a financial advisor and evaluating all other alternatives before borrowing against your 401k.