Legal Question in Bankruptcy in Texas

Re: are 401k loans exempt from chapter 7

The money in the 401(k) is exempt as a matter of federal law (actually, under a case called Patterson v. Shumate, it is not even an asset of the estate). The question you ask has a lot of detailed ramifications that may depend on the judge. First, a Ch. 7 won't stop the payroll deductions for a 401(k) loan unless you want it to, and if you do, it will trigger the tax consequences unless the loan is paid off in a timely manner. If you have assets being administered by the trustee, it may be that the tax liability would be deemed pre-petition and payable from those assets, but it would not be dischargeable, so if not paid by the trustee you will owe it. While the deductions do not stop automatically, they will not necessarily be considered expenses reasonably necessary for the support of the debtor and his/her family, and may be excluded from the Schedule I/J budget (although if the deductions are excluded, the tax consequences need to be added in on the expense side). If there is too much disposable income there when income and expenses are compared, the case may have to be dismissed or converted to Chapter 13 under Section 707(b) for "substantial abuse." The rationale is that repaying a 401(k) loan is paying yourself, which should not come ahead of paying your creditors.

In any event, your lawyer needs to look at how the judges and trustees in your district view this issue. You should not try to deal with this without an EXPERIENCED bankruptcy practitioner (NOT just someone who handles a lot of cases). It can be a complex issue.

Re: are 401k loans exempt from chapter 7

Exemptions are a matter of State law. I am not admitted in Texas, so I cannot provide answers to local questions. It is possible that the loans lost their protected status. If you let me know where you are, perhaps I can reccomend an attorney for you.