401k loans

[laywerless]

What is the name of your state? FL

Hi,
I am helping my mother-in-law file a chapter 7 bankruptcy. She borrowed against her 401k in the form of three loans and pays back the loans out of her paycheck. Where do I list these loans? Are they considered secured?

I have asked this other question one time before but would love another opinion... She has her car loan through a credit union with which she also has a $3000 signature loan. She wishes to reaffirm the car loan (which has not fallen behind) but let go of the other. Can or will they give her a hard time reaffirming the debt unless she tries to do both? Or will they more likely "take what they can get" and reaffirm the car loan alone?

Thanks in advance!
Heather

[Ladynred]

401K loans are not secured loans at all. In fact, the BK courts generally see them as a paying yourself back and will then take that pay-back money and add it back into her disposable income.

As for the credit union problem, she needs to go thru the loan papers for BOTH the car and the line of credit. If the CU has cross-collateralized the loans, she's not going to be able to get out of the $3000 loan - and that's exactly why CU's use this method. If the specific terms are NOT spelled out in her loan papers, then it may be ok, but most CU's use cross-collateralization as a way to cut losses if you file for BK.

[racer72]

I talked to a BK attorney yesterday and asked him about 401k loans as there has been a lot of confusion about them. He said it is really dependant on the rules that govern the 401k. Some require that the loans be discharged, others don't. He also said that the bankruptcy court cannot force you to give up the loan because of the tax liabilities associated with excusing that type of loan. The borrower could be liable for a 10% tax penalty and bankruptcy should not cause additonal tax liabilities. It is the same reasoning that creditors cannot issue 1099 forms to borrowers following a bankruptcy, it forces a tax liability onto someone considered insolvent.

[Ladynred]

Good info, and the tax liability portion of it is of concern. Definitely need to know the details of the 401K then.

[laywerless]

thanks for all the replys. Where in the bankruptcy papers should I list the payments made back to the 401k then? Would it be on Schedule E or F? Or am I seeing that it would rather be listed as a payroll deduction on Schedule I? Just wondering if we need to separate out and list them as "loans" with all the account numbers, etc...

Thanks again!
Heather