401K Loans

At Second Chance Legal Services we often get the question: Can I keep my 401k if I file for bankruptcy protection?  The answer to that question is fairly straight forward.  As long as your 401k is a legitimate retirement plan that follows all IRS rules (most plans are extremely interested in compliance) your 401k is fully protected in both a Chapter 7 and Chapter 13 Bankruptcy.  However, the follow up question is sometimes more difficult:  What happens with my 401k loan when I file for bankruptcy.
First, this debt is non-dischargeable as it is in essence a debt to yourself.  Failure to repay a 401k loan means that this “loan to yourself” becomes a “distribution” and can often lead to significant tax implications.  Second, in a Chapter 13 bankruptcy you do have a general right to repay this indebtedness, and it is general in your best interest to do so.  In a Chapter 7 bankruptcy you don’t have a right to schedule repayment of a 401k loan on your bankruptcy schedules.  Therefore, this indebtedness cannot be used to help you qualify for a Chapter 7.   However, if you qualify to file a Chapter 7, you may continue to make payments on your loan.
Ultimately the determination of whether an individual should maintain their payments on a 401k during the bankruptcy process should be a decision made after carefully reviewing their particular financial situation with a qualified bankruptcy attorney with experience with cases involving 401k loans.
 
Second Chance Legal Services is a bankruptcy law firm located in Madison Heights, MI.  While we are located in Oakland County, we service Wayne, Oakland and Macomb County residents.  As Detroit Bankruptcy Attorneys we specialize in helping individuals escape their burden of debt in order to get a fresh start on their bright future.
Because of our small size our clients get individual attention.  You will have the same bankruptcy attorney throughout your case whether you are in a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy.  Your attorney will help guide you through the bankruptcy process in order to help you get a successful discharge of your debt.
It is important to note that Macomb County Bankruptcy Attorneys, Oakland County Bankruptcy Attorneys and Wayne County Bankruptcy Attorneys all deal with the same judges and trustees.  This is because all Michigan Bankruptcies are filed with the federal bankruptcy court in Detroit, MI.  For this reason, it is important that you choose an attorney not by location but rather by how comfortable you feel with them when you meet.  If you don’t feel comfortable with their knowledge, their experience or their demeanor you should seek out an attorney that you do feel comfortable with.
If you are interested in speaking with a Detroit bankruptcy attorney from Second Chance Legal Services, please contact our office at 248-629-6367 for a free initial consultation.