Are Pension or 401k Loans Dischargeable?

A significant percentage of retirement plans, like pensions or 401k plans, allow you to borrow money from individual accounts in case of need. One of the most common situations is debtors borrowing money from their retirement accounts to try to pay back their debts. Unfortunately, if these debtors decide to file bankruptcy, the pension or 401K loans they took out will not be dischargeable in Chapter 7. Further, if a bankruptcy was filed, these retirement accounts could have been protected in their entirety since retirement accounts are fully exempt under either federal or New York exemptions in either Chapter 7 or Chapter 13 bankruptcy.

Bankruptcy court views loans from retirement accounts differently than a credit card, a car loan or a mortgage. When you borrow from your retirement account, you are essentially borrowing from yourself, and as result, the loan is not considered dischargeable in Chapter 7 bankruptcy. However, these loans can possibly be included in a Chapter 13 bankruptcy repayment plan, and any amount not repaid at the completion of the 3-5 year plan will typically be discharged. If you have already taken a loan against a pension or 401k account, then Chapter 13 might be the best option, depending on other factors. For many debtors, a pension or 401k account are their biggest assets that should be protected and a bankruptcy filing prior to borrowing money from those accounts would do that.

While borrowing from retirement funds is often seen as a last resort, it should not be. There could be a good reason to borrow against a retirement account in a healthy financial situation, but as a desperate effort to pay bills, borrowing from a pension or 401K will do more harm than good. Realize that if you are considering taking a loan against a retirement account that you have already reached the last straw. Discussing your bankruptcy options should really be the next step.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.