Can I Take Out A 401(k) Loan After Filing Chapter 13 Bankruptcy?

You are in the middle of a Chapter 13 bankruptcy. You have been making your plan payments every month. Then life happens. Your car breaks down. A medical bill shows up. Your roof starts to leak.

You remember you have money sitting in your 401(k). So you wonder: can I borrow some of it to get through?

This is a very common question. It is a fair one, too. The good news is that a 401(k) loan during Chapter 13 is often possible. But there is one big rule you have to follow first. This article explains it in plain English.

The Short Answer

In most cases, yes, you can take out a 401(k) loan after you file Chapter 13. But you cannot just do it on your own.

You must ask the bankruptcy court for permission first. Your attorney does this by filing a paper called a "Motion to Incur Debt." The judge looks at why you need the money. If it is a real need, like a car or medical bills, the judge usually says yes. If it sounds more like a want, the answer may be no.

So the key point is simple. Talk to your bankruptcy lawyer before you touch your 401(k). Getting permission first protects your case.

Why You Need Court Permission

When you are in a Chapter 13 bankruptcy plan, you are paying your creditors over three to five years. During that time, the court watches your money closely.

A 401(k) loan is still a loan. You are taking on new debt. While you are in Chapter 13, you usually cannot take on new debt without asking the court first.

This rule is there to protect both you and your creditors. The court wants to make sure a new payment does not throw your plan off track. If you take on a loan payment you cannot afford, you might fall behind. That could put your whole case at risk.

So the law requires your lawyer to file a Motion to Incur Debt. Your lawyer prepares it and files it with the court. In some cases, you may need to attend a short hearing.

What the Judge Looks At

The judge wants to know one main thing. Is this loan for something you truly need?

In Chapter 13, your spending must be "reasonably necessary" for you and your family. This idea comes from the Bankruptcy Code (see 11 U.S.C. § 1325(b)). The judge uses that same standard when deciding whether to let you borrow.

Here are reasons a judge often approves:

• Your only car breaks down and you need a replacement to get to work
• You have a medical emergency or new medical bills
• Your home needs an urgent repair, like a broken furnace or a leaking roof
• You have another real and pressing need for your family

Here are reasons a judge may turn down:

• A vacation or a luxury purchase
• A new car when your current one works fine
• Tuition for an adult child's college

That last one is not just a guess. In a North Carolina case called In re Martin (M.D.N.C. 2011), the court said that taking on a new loan to pay for an adult child's college was not reasonably necessary. The court said helping an adult child with college is a choice, not a basic need.

So the difference between a "need" and a "want" really matters. Be ready to explain your reason clearly.

Is Your 401(k) Protected in Bankruptcy?

Many people fear that filing bankruptcy means losing their retirement savings. In most cases, that is not true.

A 401(k) that is "ERISA qualified" is usually fully protected. ERISA stands for the Employee Retirement Income Security Act of 1974. Most workplace 401(k) plans fall under this law.

The U.S. Supreme Court confirmed this in Patterson v. Shumate (1992). The Court said money in an ERISA qualified plan is kept out of the reach of your bankruptcy creditors. There is no dollar cap on this protection.

To show your plan is protected, your lawyer will likely need a copy of your plan summary. That document usually includes the ERISA statement.

The main point is this. Your 401(k) is usually safe in bankruptcy. Borrowing from it is a separate question that needs court approval.

How the Process Works, Step by Step

If you want to borrow from your 401(k) during Chapter 13, here is what usually happens:

1. Talk to your lawyer first. Do not start the loan before you do this.
2. Know your reason. Be ready to explain why you need the money and how much.
3. Your lawyer files the motion. This is the Motion to Incur Debt.
4. The court reviews it. The trustee and the judge look at your request.
5. You may attend a hearing. You or your lawyer explains your need to the judge.
6. The judge decides. If the reason is a real need, the judge often says yes.
7. You take the loan. Only after you have permission.

This process can take a little time. So if you see a need coming, start early.

A Word About Repaying the Loan

A 401(k) loan is not free money. You have to pay it back, usually through payments taken from your paycheck.

That new payment will lower your take-home pay. The court wants to make sure you can still afford your Chapter 13 plan payment after the loan payment starts. This is part of why the judge reviews your request.

Be honest with yourself and your lawyer about your budget. A loan that helps you today should not break your plan tomorrow.

How This Works in North Carolina

North Carolina has a very active Chapter 13 system. The Middle District of North Carolina has one of the highest Chapter 13 filing rates in the country. In 2025, about 53% of all bankruptcy cases there were Chapter 13. The national average is closer to 36%.

North Carolina is also an "opt-out" state. This means you must use North Carolina's exemption laws, not the federal exemption list (see N.C. Gen. Stat. § 1C-1601). North Carolina law protects retirement accounts, and these protections are read in favor of the debtor.

If you live in Greensboro, Charlotte, Winston-Salem, Asheville, High Point, Salisbury, or a nearby town, a local bankruptcy attorney will know your court's habits. Each court has its own forms and routines. A lawyer who works in your district can make the motion process smoother.

One more North Carolina note. Your plan must be filed and run in "good faith." A recent case, Goddard v. Burnett (4th Cir. 2026), reminds us that following the math is not enough. The court also looks at fairness. This is another reason to keep your loan request reasonable and tied to a real need.

Chapter 7 vs. Chapter 13: Does This Even Apply?

This question really only comes up in Chapter 13. Here is a quick look at why.

In a Chapter 7 case, the case is short and there is no long-term plan to protect. In Chapter 13, the court stays involved for years, so it wants a say in new debt. If you want a fuller comparison, see our guide on Chapter 7 vs. Chapter 13.

What Should You Do Next?

If you think you may need a 401(k) loan during your Chapter 13, here are some calm next steps:

• Pause before you act. Do not start the loan on your own.
• Write down your reason. Be clear about what you need and why.
• Call your bankruptcy lawyer. Ask if a Motion to Incur Debt makes sense.
• Look at your budget. Make sure you can handle both the loan and your plan.
• Be patient. Getting court approval takes a little time, so plan ahead.

These steps protect your case and keep you in good standing with the court.

Talk to Duncan Law

If you are in a Chapter 13 case and wondering about a 401(k) loan, you do not have to figure it out alone. Duncan Law can review your situation and help you decide if a Motion to Incur Debt is the right move.

We help people throughout North Carolina. You can schedule your free consultation online, or call the office closest to you:

• Greensboro: (336) 856-1234
• Charlotte: (704) 563-1224
• Winston-Salem: (336) 245-4294
• Asheville: (828) 348-5252
• High Point: (336) 294-5800
• Salisbury: (704) 297-4000