4 Things to Know About 401(k) loans and Las Vegas bankruptcy

Thinking of filing for bankruptcy in Las Vegas? Do you have an outstanding 401(k) loan?

Here are 4 things to know about 401(k) loans and bankruptcy:

1. If you file for Chapter 13 bankruptcy, an outstanding 401(k) loan actually is helpful to you with regard to the means test. Why? Because your payments are counted as an expense which in turn lowers the amount from which you will be paying creditors back.

2. If you wish to file for Chapter 7, however, an outstanding 401(k) loan is not helpful for passing the means test. This is because the loan is not counted as an expense for Chapter 7 means test purposes. (One of many inconsistencies in the 2005 bankruptcy law.) This means that even though you clearly have an expense you need to make payments on, you don’t get credit for it in the calculations for the means test to determine your Chapter 7 eligibility.

3. Always inform your bankruptcy lawyer about all of your expenses. Your bankruptcy lawyer will know how to make sure you get the most benefit from the bankruptcy process. And to do this, you need to make sure your bankruptcy lawyer has all of the pertinent information, including all of your expenses.

4. The money you have in 401(k)s and other deferred compensation plans is actually protected in a bankruptcy filing. That means creditors can’t touch it if you file for bankruptcy. As a result, strategically you’re better off if you leave your money in the 401(k). At least until after your bankruptcy case is completed. If you take it out before, then you’re just giving away extra money to creditors that you don’t need to give away. Of course, there are times when you really need cash. And a 401(k) loan may be the only way to get it. But to the extent possible, it’s best to try and avoid taking money out of your 401(k) from a bankruptcy strategy perspective.

401(k) loans and the bankruptcy process raise some tricky issues. Please feel free to contact an experienced Freedom Law Firm bankruptcy attorney at 702-745-8584 for a free initial consultation if you have questions about these and other bankruptcy-related topics.