Are Pension or 401k Loans Dischargeable in Bankruptcy in New York City?

Most retirement plans like pensions or 401K’s allow you to borrow money against them if you really need to.  One of the most common situations we see in our New York City bankruptcy law practice is clients borrowing money from their retirement accounts to try to keep up with out of control debts.  Sadly, when these clients finally decide to file bankruptcy the pension or 401K loans they took out will not be dischargeable in Chapter 7.  To add insult to injury most of these drawn down retirement accounts could have been protected in full had the client filed bankruptcy sooner.

Loans from your retirement account are viewed differently by the New York City bankruptcy court than a car loan or a mortgage would be.  If you borrow from your retirement account you are essentially borrowing from yourself, and as such 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 then Chapter 13 might be your best option, but contact a bankruptcy attorney for a free consultation.  Don’t dip into your nest egg if you are struggling to pay your debts.  You’ve spent years building your pension or 401k, and if you are like most debtors in New York City it will be gone in the blink of an eye if you are already struggling financially.

When out of financial options many people will turn to their retirement funds as a last resort, but depleting your pension or 401K before filing bankruptcy is unnecessary.  The funds can be protected in full by filing bankruptcy, but on the other hand any loans against them cannot be discharged through Chapter 7.   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 live in New York City contact the Law Offices of William Waldner online or at 212.244.2882 to arrange a free bankruptcy consultation today.  We only practice bankruptcy law and maintain a 99% Chapter 7 bankruptcy discharge record in New York City as of 8/31/16.

**** DISCLAIMER: This article is intended for educational purposes only. By reading no attorney-client relationship has been created. Prior results do not guarantee a similar result for future clients.