Can I make retirement account loan payments during Chapter 13?

Payments on retirement account loans are allowable expenses in Chapter 13 bankruptcy.

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If you have a retirement account loan, you can continue making your required monthly payments during Chapter 13 bankruptcy. However, once your retirement account loan is paid off, your Chapter 13 plan payment will most likely increase. Read on to learn more about how retirement account loan payments are treated in Chapter 13 bankruptcy.

(Get comprehensive information on Chapter 13 bankruptcy.)

What Is a Retirement Account Loan Payment?

If you have a retirement account, you can typically borrow money from it when you need it. A retirement account loan is different from a traditional loan in that you are essentially borrowing money from yourself. However, you are still required to repay the amount borrowed by making monthly loan payments.

The benefit of a retirement loan is that you can access your money without incurring the usual penalties and tax consequences associated with early withdrawal of retirement funds. But if you fail to pay back your loan, it will be treated as an early withdrawal.

How Are Retirement Account Loan Payments Treated in Chapter 13 Bankruptcy?

In Chapter 13 bankruptcy, you propose a plan to pay back a portion of your debts. The amount you must pay unsecured creditors (such as credit card companies) depends largely on your income and expenses. In general, all of your disposable income must be used to pay back your unsecured debts through your Chapter 13 plan. (Learn more about what you pay through your Chapter 13 repayment plan.)

If you have a retirement account loan, your monthly payment is typically treated as an allowed expense that reduces your disposable income. This means that you will not be required to pay as much towards your unsecured debts.

What Happens When Your Retirement Account Loan is Paid Off?

When your retirement account loan is paid off, your disposable income will increase because you will no longer be required to make monthly loan payments. As a result, you will usually have to increase (step up) your plan payment by the amount of your retirement account loan payment when the loan is paid off. Most Chapter 13 trustees will ask to see your retirement account loan payoff information to determine when your plan payment should adjust.

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