My name is Ron Drescher. I’m an attorney practicing
in bankruptcy and commercial litigation in Maryland,
Virginia, Delaware and Pennsylvania, and this weekend
I’m at the NACBA convention in San Antonio. That’s the National
Association of Consumer Bankruptcy Attorneys. Another thing
that I found very interesting is I learned a little bit about
how 401(k) payments are dealt with in Chapter 13. Many, many debtors
who find themselves in cash flow problems borrow from
their 401(k), and then there are very rigid repayment obligations
to these 401(k) loans. In fact, the bankruptcy code specifically
says that 401(k) loan repayments are permitted and are
to be deducted from your gross income to figure out what your
net disposal income figure is going to be when you repay your
creditors. At the end of your loan repayment period, you’re done.
You’re done paying back this loan. And really what you’ve been
doing is you’ve been repaying money that you borrowed from yourself.
So theoretically, you’re preferring yourself
over your creditors when you repay your 401(k) loans. And even
though that’s something that is generally frowned upon in
the Chapter 13 world, it’s specifically authorized in the bankruptcy
code. Now, what happens when you’re done with your 401(k)
loan repayment, and it’s during that five-year Chapter 13 repayment
period? Well, Sixth Circuit Court of Appeals has recently
said once you’re done with your 401(k) loan repayment you can’t
resume 401(k) loan deductions from your paycheck. Why? Because
you’re paying yourself before you’re repaying your creditors.
And that’s generally a no-no under Chapter 13. So some
courts have been saying well, we’re going to look at what you
were deducting before you filed for bankruptcy, and we’re
going to let you resume those deductions from your payroll.
The Sixth Circuit would have none of that. Sixth Circuit says
until you’re done with your five-year repayment period, if you’re
not paying your credits a hundred cents on the dollar, you’re
going to have to pay all of your net disposal income for the
benefit of your creditors, and that would include any money
that you would otherwise want to set aside into your 401(k)
plan. My name is Ron Drescher. I practice in bankruptcy and
commercial litigation. If you have a question about any
of this, I’d love to hear from you, and thank you for tuning
in and watching this video.