Why Should I File A Bankruptcy Instead Of Taking A 401k Loan?

Unfortunately, our educational system was fundamentally flawed when I was in school and probably still is but not in the way you might think.  Americans are not taught, at least on any consistent basis, the fundamentals of personal finances.   We are young and do not have to worry about tomorrow.  So when people are given the option to contribute to a 401k all too often they opt out because, after all, they need more money in their weekly paycheck just to make ends meet.  Then there is a segment of the working population that opt to contribute to their 401k (usually minimally).  Perhaps, they are single or living with their parents and they won’t really be impacted by receiving a few dollars less on a weekly basis.

Life continues and perhaps, the once single person contributing to an 401k is now married with a family.  They are still faithfully contributing to their 401k but they need a replacement vehicle as their vehicle just suddenly died or the escrow portion of their mortgage increased due to a tax increase and now their mortgage is $150.00 more than it was last month.  How does the Average Joe deal with the daily increase in living when their pay checks only consistently go down?

Please do yourself a favor and consider Bankruptcy before you take your next 401k loan.

Remember, “Life is 10% what happens to you and 90% how you react to it.” ***Charles R. Swindoll

The answer is far to often, they take a 401k loan just to make ends meet.  When you are living pay check to pay check sometimes it seems like it is the only answer.  There are several reasons you should not take a 401k loan.  The most important one is that the loan is just that, it is a loan.  You have to pay it back.  You may say to yourself I need the loan to fix the car now so I will just pay myself back out of my check.  You may say no problem we can cut back on a few things but then the hot water heater needs to be replaced and then what?  That is life, right?

The problem is that you did not have the money to fix the car and you were barely making ends meet.  Now after the 401k loan you have less money coming home every pay period.  Based on my experience, 401k loans repayments unusually average $150.00 to $300.00 or more per pay period.   The loan period can range from very short term to 5 or even 10 years!    I have even seen pay checks that have had as many as 4 loan repayments at one time which leaves very little to actually live.

Another think you must consider before taking a 401k loan is that if you are unfortunate enough to lose your job before the loan is paid back the loan has important and severe tax implications for that pending tax year.  If you are in this situation you should consult with a Certified Public Account who can advise you how to best handle your situation.  Filing a bankruptcy after taking a 401k will be helpful but bankruptcy does not eliminate the need for you to repay the 401k loan.

If you file a bankruptcy before taking a 401k loan it may free up money pretty quickly if you are spending hundreds if not thousands of dollars on credit card payments each month.  A 401k is a protected asset in a bankruptcy which means you get to keep it.  Congress deemed retirement accounts to be so important that it protected accounts from creditors.  The retirement account cannot be liquidated to pay your creditors. So there is no need to feel guilty or ashamed because protecting your 401k is the law.  Many people believe taking 401k loans is the right thing to do but you must consider your personal finances a small business, allowing you to do the right thing to keep your business a float.  Chapter 7 and Chapter 13 filings are personal restructuring.

Whether you choose to file bankruptcy or not, we all must do our best to save for retirement and in doing so must also be diligent for saving for the next emergency “because life happens.”  A good suggestion is to set-up a savings account and have a certain amount deducted automatically from your check (kind of like paying yourself for the future).  Open an account at a small out of the way bank.  Somewhere were you are less likely to go out of your way to dip into the funds in your savings account.  Although there are pros and cons consider not linking it to an ATM card to limit the likelihood of an impulse withdrawal.

Trust me I know it is very hard to save; however, we need to save and teach our children and grandchildren to do the same.

I Filed Bankruptcy And Received A Notice Of Abandonment From The Trustee In Bergen County. Do I Need to Leave My Home?

One of the most frequently asked questions by debtors who have filed bankruptcy is, “What does the Notice of Proposed Abandonment Mean That I Received From The Court?”  The word “abandon” sounds alarming to someone who is unfamiliar with the bankruptcy process.  Most debtors do not read beyond the heading and go directly into panic mode.  The notice actually states that the trustee has determined that the “property of the estate described below . . . [is of] inconsequential value.”  Put another way “your stuff was not valuable enough.”

The Notice of Proposed Abandonment is a form notice that trustee’s have to file usually at the conclusion of a bankruptcy case to formerly release his/her interest in the debtor’s property.  It is not something to be afraid of as it simply means that that the trustee doesn’t want to sell your home, etc. The trustee  has determined that your property (i.e., real estate) does not have enough equity  to pay a meaningful dividend to your unsecured creditors.

Abandonment in a bankruptcy is a good thing.  There is nothing to be afraid of as the abandoned property becomes yours again.

Abandonment in a bankruptcy is a good thing. There is nothing to be afraid of as the abandoned property becomes yours again.

Although unsecured creditors could object if they believe there is something of value that should be liquidated it is extremely rare.  Trustee’s are experienced at valuing assets and through an analysis of your case make a determination as to whether the property being abandoned could have netted proceeds for unsecured creditors if sold.  Let’s not forget, trustees make a commission on selling assets which are part of a bankruptcy estate.  The trustee is not going to abandon his/her interest in something valuable.

Upon abandonment the property being abandoned becomes yours again to do as you see fit.  So if you just received the Notice of Proposed Abandonment you are one step closer to discharge and your fresh start.

I Want To File Bankruptcy But My Child Is Attending A Private Catholic School In New Jersey. Is That A Problem?

The answer is maybe.  In the last several years Chapter 7 bankruptcy trustee’s have become hungrier and have had to search a little deeper to net a dividend to unsecured creditors.  A bankruptcy trustee is a person, very often an attorney, is appointed to over see your Chapter 7 case and to ensure there are no unprotected funds that could be used to pay your creditors.  In recent years, Chapter 7 trustee’s have began pursing tuition payments already made by parents through a process called a claw-back.  In essence, the trustee could you previous paid tuition money to pay your unsecured creditors.  Even more recently Chapter 7 trustee’s have gone even further trying to claw back payments made for debtors’ children’s college tuition.

Bankruptcy can sometimes effect student's tuition payments made by their parents.

Bankruptcy can sometimes effect student’s tuition payments made by their parents.

A trustee can bring suit to recover money paid to third parties by a debtor if the debtor did not get “reasonably equivalent value” for the money that the debtor paid. The Bankruptcy Code does not define the term “reasonably equivalent value,” giving trustees some leeway when it comes to pursuing what they may consider to be improper pre-bankruptcy payments or transfers of money.  The Chapter 7 trustee’s position is that the payments qualify either as a gift, which allows for a 1 year look back period or a fraudulent transfer which encompasses a look back period that can range from 4-6 years.

Congressman Chris Collins Republican representative for the 27th district of New York, has introduced the Protecting All College Tuition (PACT) Act which aims to amend the Bankruptcy Code Section 548. Its stated purpose is to stop trustees from “clawing back tuition money from universities,” although there is a school of opinion that believes trustees will still be able to sue under various individual state’s “fraudulent transfer” statutes to recover money previously paid out in the form of fees.

If the PACT Act is not adopted, or if it proves to be inadequate in terms of stopping bankruptcy trustees from targeting universities, institutions might start demanding that students or approved third party funds or trusts take legal responsibility for tuition payments. Alternatively they might demand that parents responsible for fees provide financial statements when the make payments. This would aim to verify that the payee was solvent when the payment was made.  This is absolutely something that parents should be aware of if they are starting to navigate college payment options with their children.

There are things that can be done through a process known as bankruptcy estate planning which can help you strategize prior to filing bankruptcy so that your children’s education can gone on as uninterrupted as possible.  If you are considering filing bankruptcy and have children in either private school or in college be sure to consult with experienced bankruptcy counsel.


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