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How Are 401k Loans Handled in Bankruptcy?


Many individuals take out 401k loans in order to keep up with their bills and expenses. These 401k loans are then required to be paid back in order to avoid 401k withdrawal penalties. Often times 401k loan repayments are a mandatory payroll deduction, taken directly out of your paycheck.

401k loans are not considered a debt for bankruptcy purposes. The reason is that you are basically paying yourself back for money which you took out of your own 401k. It wouldn't make sense that you are your own creditor.

For Chapter 7 bankruptcies, 401k loan repayments are not an expense you can deduct from your monthly income. You CANNOT deduct these repayments for Means Test purposes and the money that you are spending for your 401k loan repayment is considered disposable income.

For Chapter 13 bankruptcies, the situation is different. 401k loan repayments CAN be deducted from your monthly income and is therefore not considered disposable income. Why you can deduct 401k loan repayments in a Chapter 13 and not a Chapter 7 is one of numerous areas where the bankruptcy laws seem to contradict themselves.

If you are considering bankruptcy, contact an Orange County Bankruptcy Lawyer at 1st California Law.

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