Chapter 13 Bankruptcy – What Happens When I Pay Off My 401k Loan?

In a Chapter 13 bankruptcy, your plan payment will increase when you pay off your 401k loan.  I recently met with a Cartersville GA chapter 13 bankruptcy client who had this question.

Like many Georgia consumers, this Cartersville GA bankruptcy client tried to fix their credit card situation by borrowing against their 401k in an attempt to avoid Chapter 13 bankruptcy.  Since their interest rate on their credit card debt was 25 percent and the balance owed was much higher than the amount they could borrow against their 401k, they did not really accomplish much by borrowing against their retirement.

In their chapter 13 bankruptcy, they had a 401k loan that we will say was $100.00 per month that was going to pay off in 12 months (I’m changing the facts here a bit because round numbers are easier to follow).  In a Chapter 13, the Trustee’s job is to make sure that you are paying all of your disposable income into the case.  In theory, when the 401k loan pays off in 12 months, the Cartersville GA bankruptcy client will have an extra $100 each month.  Guess who wants that extra $100.00?  The chapter 13 trustee wants it.  To make sure this happens, your bankruptcy attorney must put a provision in your chapter 13 plan that says that your plan payment will increase by 100 per month when the 401k loan is paid off.  This provision is commonly referred to as a “step provision.”

In the Cartersville GA bankruptcy client example, my office will file a new employment deduction order increasing their Chapter 13 plan payment by $100.00 per month after the 401k loan is paid off.  Sometimes, an employer will ignore the new EDO.  When this happens, the debtor must pay the extra amount to the trustee or else they will fall behind a little more and more as each month passes.  Eventually, the Trustee will file a motion to dismiss the case if the situation is not corrected.

In bankruptcy cases where there has been an increase in expenses, your bankruptcy attorney may be able to lower the Chapter 13 plan payment back down if there is justification.

Other Posts:

1.  Will I keep my 401k if I file bankruptcy in Georgia?

2.  Should I borrow against my 401k to pay off my credit card debt?

3.  What is Chapter 13?

4.  What is Chapter 7?

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