Can I take a loan from my 401K to buy a distressed property in another state while on a Chapter 13 plan?

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Can I take a loan from my 401K to buy a distressed property in another state while on a Chapter 13 plan?

I intend to refurbish and rent it out until I retire in 15-17 years. It will not make be a positive cash flow while I’m on the Ch 13 plan. I rent where I live now and this is the only way I see that I’ll ever be able to own my home when I retire, but low prices won’t be around after I’m off the plan.

Asked on August 24, 2010 under Bankruptcy Law, Colorado

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Possibly, with the consent of the bankruptcy trustee and/or court, and presumably subject to the creditor's right to raise objections. However, there is no automatic right to engage in such a large transaction while under your Chapter 13 repayment plan. Remember: under that plan, essentially all your income from any sources, other than that approved for your cost of living as it stood when the plan was approved, needs to be dedicated to paying back your creditors. You cannot necessarily go "off plan" and pay a large sum of money for your benefit, not for your creditors. The fact that the conditions might be good right now to buy has no bearing on things; you voluntarily choose to file bankruptcy and are bound by the plan. Certainly, you can--and should--consult with a bankruptcy attorney to get a detailed opinion, based on the specifics of your plan and situation; you might also inquire of the bankruptcy trustee. However, the one thing you should *not* do is simply go ahead and do this without checking in detail into whether you in fact have the right.


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