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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.