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Chapter 13 and a Hardship Withdrawal of Retirement Money

Over 60% of Filers Do Not Complete a Chapter 13

A Chapter 13 bankruptcy is for qualified individual debtors who have an income and are willing to commit to a payback plan on a portion or all their debts, normally for 3 or 5 years. About 1 in 3 who file a Chapter 13 completes the bankruptcy process and have their case closed. The other two thirds either convert to a Chapter 7 bankruptcy or have their case dismissed.

Problems in Staying with a Chapter 13 Plan

There should be no wonderment that problems arise during a Chapter 13. For starters, many people who have to file a bankruptcy have not been good at managing a budget or have had a catastrophic financial event occur that bankrupts them. Basically, a Chapter 13 is simply a budgeted pay back plan. For those who are not use to being disciplined enough to live on a budget before bankruptcy, they will struggle with the same discipline to live on a budget during a Chapter 13. Temptations will inevitably arise.

As an example, a debtor recently reported on a bankruptcy forum website that he had borrowed money against his 401(K) retirement account without the bankruptcy court trustee’s knowledge, all of this while he was committed to a Chapter 13 bankruptcy plan. When the trustee caught the pay back on the retirement account loan from a pay stub, the trustee filed for dismissal of the case because the retirement loan was considered a new debt. Bankruptcy rules state you must report all changes in income and debt to your trustee.

Hardship Problems Can Occur During a Plan

Fortunately for this particular debtor, his lawyer was successful at convincing the bankruptcy court judge the debtor had to take on the new debt for a hardship. His heater had gone out in the dead of winter, and it was the only way he could replace it. The judge still could have dismissed the case because the debtor violated the rules by not advising the trustee of the new debt. In a Chapter 13, new debt affects the payment plan and the debtor’s ability to make the plan as originally agreed.

Results and Solution to the Problem

It is probably never a good idea to withdraw or borrow against retirement income when you are in a Chapter 13 bankruptcy, and it is never a good idea to hide any financial dealings from a bankruptcy court trustee. The trustee was right to challenge the debtor, and the debtor was lucky the judge had compassion for his circumstances.

The debtor illustrated above reported the trustee tacked on an additional $120 per month on his payment plan after the debtor got a 3% raise. That too is within the rights of the trustee. If the debtor had problems paying for a necessity like his heater and was willing to rob his future retirement to survive, what chance does he have of making the additional payments?

It is these kinds of problems, along with a thousand other variety, that make completing a Chapter 13 so demanding and hard. Check with a bankruptcy lawyer before you make financial commitments while in a Chapter 13. It is a good idea to be up front with the bankruptcy court, their administrators, and your lawyer.