Q: I am considering taking a loan from my 401k but plan on filing bankruptcy within the next 30 days. Is this a bad idea?
It is due to my partner being out on FMLA leave and without that income being unable to pay our rent and car payments etc.
A: This depends on the circumstances, such as whether you are looking at chapter 13 or chapter 7 bankruptcy, what you intend to do with regard to the car through the bankruptcy, etc. Generally speaking, though, 401K loans are not treated as true loans in bankruptcy, so you will have to repay it according to the terms of the agreement. When going through the bankruptcy process, though, you may have limited resources to make the payments, meaning that you could default on the 401K loan. If so, then the IRS will treat the matter as if you withdrew the money from your 401K, which can be expensive. Moreover, if you would take out more than you need, the extra money may or may not be exempt from the bankruptcy process, whereas the 401K is generally exempt.
Justia Ask a Lawyer is a forum for consumers to get answers to basic legal questions. Any information sent through Justia Ask a Lawyer is not secure and is done so on a non-confidential basis only.
The use of this website to ask questions or receive answers does not create an attorney–client relationship between you and Justia, or between you and any attorney who receives your information or responds to your questions, nor is it intended to create such a relationship. Additionally, no responses on this forum constitute legal advice, which must be tailored to the specific circumstances of each case. You should not act upon information provided in Justia Ask a Lawyer without seeking professional counsel from an attorney admitted or authorized to practice in your jurisdiction. Justia assumes no responsibility to any person who relies on information contained on or received through this site and disclaims all liability in respect to such information.
Justia cannot guarantee that the information on this website (including any legal information provided by an attorney through this service) is accurate, complete, or up-to-date. While we intend to make every attempt to keep the information on this site current, the owners of and contributors to this site make no claims, promises or guarantees about the accuracy, completeness or adequacy of the information contained in or linked to from this site.
