Can I Take Out A 401(k) Loan After Filing Chapter 13 Bankruptcy?
As long as your 401(k) is ERISA qualified and was exempted (protected) in your bankruptcy petition, you can most likely take a loan against the account while in an active Chapter 13 bankruptcy. However, you MUST get the court’s permission!
When you are filing for bankruptcy, one of the top concerns is to protect your assets. There are federal and state exemptions available to protect any equity or funds in your possessions. A 401(k) plan is a common account that should be protected from the bankruptcy creditors. Through the case of Patterson vs. Shumate, there is no limit to the amount that may be protected under this exemption as long as the plan or account is ERISA qualified (Employee Retirement Income Security Act of 1974). You will need to provide documentation proving the plan is ERISA qualified, such as a copy of the plan summary that includes the ERISA statement.
To obtain a loan from your 401(k) while in a Chapter 13 bankruptcy you must get the court’s permission. Your bankruptcy lawyer can do so by filing a Motion to Incur Debt. You would have to appear in front of the judge to get the judge’s permission. The judge will usually grant permission to pull from your 401(k) loan if you can provide a good reason for why you need the money. This, typically, needs to be something that is a necessity, not just a “want”. An example of this may be if you need money to purchase a vehicle after another one has broken down or if you need money to pay medical expenses that were incurred after the filing of the bankruptcy. Discuss this with your bankruptcy lawyer before starting the loan withdrawal process.
How Do I Determine the Value of My Home If I’m Filing Bankruptcy?
The value of your home, from a bankruptcy perspective, is a major concern that you will want to be aware of. From too much equity to the possibility of “stripping a lien“, the value of your home plays a key part in your bankruptcy. With the ever fluctuating real estate market, determining the value of your home may seem like a difficult and challenging task.
The Bankruptcy Court for the most part will rely on the tax value of your property as recorded by the Tax Assessor in the county which you reside. Many counties now have websites in which you can access detailed information on your property including the assessed value. Unfortunately, tax values don?t always reflect the true value of what your home may be worth. If you think that the tax value of your property is overstated (or understated for that matter) you can always try a different avenue in determining the value of your home such as a Comparative Market Analysis.
A Comparative Market Analysis, which is also referred to as a CMA, is an analysis done by a real estate agent to establish a home?s market value. It is not an appraisal. The CMA compares homes of similar size, condition, age, and style in the same area or neighborhood that are currently on the market, under contract and that have recently sold. The comparables will in most cases better reflect the actual value of a home. It may seem like a lot of work to obtain a CMA but if it means protecting your home and your equity, in most cases, it?s worth it.
While most real estate agents will provide you with a Comparative Market Analysis of your home at no charge, some real estate agents may charge you if you are not putting your house on the market.
Every Bankruptcy Trustee is different and you will need to discuss your home?s value and what issues may arise around it with your attorney so he or she may give you advice that is tailored to your case.
Is Life Insurance Protected in Bankruptcy?
There are two primary types of life insurance: term life and whole life. There are many ways these can be structured, e.g. as a universal policy, but for our purposes we will look at the simplified term life insurance and whole life insurance policies.
A term life insurance policy does not mature until someone’s death. As a result, when you file bankruptcy your term life insurance policy, or a policy that you are the beneficiary of, does not have any value until someone’s death. If there is no value there is nothing to protect in your bankruptcy. However, if you are paying premiums for a term life policy, the monthly premium should be listed in your budget.
A whole life insurance policy has a “cash surrender value”. This means after having the policy for a period of time, you can borrow against the proceeds. Those proceeds could then be used to pay your debts. Fortunately, as long as the whole life policy has your spouse and/or children as the beneficiaries and you are using North Carolina exemptions, it is protected under the North Carolina Constitution and the North Carolina General Statutes. The North Carolina Constitution states that life insurance proceeds where the spouse and/or children are the beneficiary are protected from the claims of creditors. As a result, you should be able to fully protect your while life insurance policy when you file bankruptcy.
If you are the beneficiary of a term life policy or a whole life policy and the person dies while you are in bankruptcy, those proceeds belong to your estate or the court. As an example, if your great uncle Billy dies and leaves you $100,000, the $100,000 life insurance proceeds would be payable to the bankruptcy trustee to pay your debts. If the life insurance proceeds pay all your debts in full, any remaining life insurance proceeds would be paid to you. Life insurance proceeds that you become entitled to within 180 days of the date the bankruptcy is filed with the court is also property of the estate. As a result, if uncle Billy dies two months after your bankruptcy is completed, but it is within the 180 days of the date you filed bankruptcy, those proceeds would become the property of the estate as well. Therefore, you should tell your bankruptcy attorney if you believe you may receive any life insurance proceeds during the six months after you file. As always, you should seek the advice of your bankruptcy attorney.
