Using 401k Loans To Qualify For Chapter 7

People with financial problems often tap into retirement accounts to pay necessary expenses. Consumers with 401k plans sometimes have the choice of borrowing from their plan or taking distributions. Taking loans, rather than distributions, from a 401k can have advantages if you ultimately have to file Chapter 7 bankruptcy. Distributions trigger some income tax liability and possible early withdrawal penalties. If you file bankruptcy the balance in the 401k would be exempt. If you take a loan from your 401k, the amount of monthly payments to your plan are deductible for purposes of calculating your disposable income under the means test. Sometimes it pays to purposefully take a loan just prior to bankruptcy to pay medical expenses , health insurance, past-due secured debts, and/or bankruptcy attorneys fees in order to show a significant 401k loan payment under the means test calculation. This is an example of how the new law calls for advanced bankruptcy planning for debtors above median income who are therefore subject to means testing.