Can I Take Out A 401(k) Loan After Filing Chapter 13 Bankruptcy?
As long as your 401(k) is ERISA qualified and was exempted (protected) in your bankruptcy petition, you can most likely take a loan against the account while in an active Chapter 13 bankruptcy. However, you MUST get the court’s permission!
When you are filing for bankruptcy, one of the top concerns is to protect your assets. There are federal and state exemptions available to protect any equity or funds in your possessions. A 401(k) plan is a common account that should be protected from the bankruptcy creditors. Through the case of Patterson vs. Shumate, there is no limit to the amount that may be protected under this exemption as long as the plan or account is ERISA qualified (Employee Retirement Income Security Act of 1974). You will need to provide documentation proving the plan is ERISA qualified, such as a copy of the plan summary that includes the ERISA statement.
To obtain a loan from your 401(k) while in a Chapter 13 bankruptcy you must get the court’s permission. Your bankruptcy lawyer can do so by filing a Motion to Incur Debt. You would have to appear in front of the judge to get the judge’s permission. The judge will usually grant permission to pull from your 401(k) loan if you can provide a good reason for why you need the money. This, typically, needs to be something that is a necessity, not just a “want”. An example of this may be if you need money to purchase a vehicle after another one has broken down or if you need money to pay medical expenses that were incurred after the filing of the bankruptcy. Discuss this with your bankruptcy lawyer before starting the loan withdrawal process.
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Dear Mr Duncan,
It is indeed crucial to get the court’s permission before trying to take out a loan or you might put yourself in a difficult situation (as I did).
/Michel