Can I continue to repay my 401K if I file for Bankruptcy?

Posted On : June 15, 2010   By : RobG

401k loan repayments are not allowed deductions from income in Chapter 7 cases. You are not prohibited from repaying these loans, but the funds used, if from your income, will be deemed available funds for your creditors and might disqualify you from Chapter 7 relief. If you file for relief under Chapter 13, you are allowed to repay your 401k loan through your Plan. Although it is absurd to allow such deductions in Chapter 13 for public policy reasons (to encourage people to make every effort to pay their debts before filing bankruptcy and not punishing them for such effort) and not allow the same deduction in Chapter 7, that is how the Bankruptcy Code is written and the courts have no discretion to change the law. Therefore, if you have a large 401k loan, it may pay you in the long run to file under Chapter 13. Be sure to discuss this with your lawyer.

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Posted in Bankruptcy FAQ