How a 401(k) Loan Affects

Chapter 13 Payments and Step-Up Plans

If you have a 401(k) loan and are considering Chapter 13 bankruptcy, it can significantly affect your disposable income, monthly plan payment, and long-term payment structure. Many people are surprised by how retirement loans are treated in Chapter 13.

This page explains how 401(k) loans are treated, how they affect your plan payment, and how step-up plans work once a loan is repaid.

---

The Short Answer

• While you are actively repaying a 401(k) loan, that payment is generally excluded from disposable income

• Once the 401(k) loan is paid off during the Chapter 13 plan, your plan payment usually increases

• This increase is typically handled through a step-up (staged) plan

Understanding this ahead of time is critical to avoiding plan objections and surprises later.

---

Why 401(k) Loans Are Treated Differently in Chapter 13

A 401(k) loan is not a debt to a creditor — it is repayment of your own retirement funds. Federal bankruptcy law recognizes this difference.

Under the Bankruptcy Code:

• Repayment of a retirement loan may be deducted when calculating disposable income

• Courts do not treat it like credit card or personal loan debt

This means trustees generally allow ongoing 401(k) loan payments at the time the case is filed.

---

How a 401(k) Loan Affects Disposable Income

While the Loan Is Being Repaid

If you are actively making 401(k) loan payments when you file Chapter 13:

• The loan payment is usually excluded from disposable income

• Your initial plan payment may be lower

• Trustees generally allow the deduction only for the remaining loan term

📌 Important:
You must be able to document:

• The loan balance

• Monthly payment

• Payoff date

---

After the Loan Is Paid Off

Once the 401(k) loan is fully repaid:

• Your take-home pay increases

• Disposable income increases

• Trustees expect that money to be redirected to creditors

At that point, your Chapter 13 plan payment must usually increase.

---

What Is a Step-Up (Staged) Chapter 13 Plan?

A step-up plan accounts for the fact that your income will increase once the 401(k) loan ends.

Instead of modifying the plan later, the plan is written upfront with scheduled payment increases.

Example

• Months 1–18:
  Plan payment = $500 (while 401(k) loan is being repaid)

• Months 19–60:
  Plan payment = $900 (after loan payoff)

This structure:

• Avoids trustee objections

• Prevents later modification litigation

• Makes the plan feasible and confirmable

---

Why Trustees Require Step-Up Plans

Trustees are required to ensure that:

• All disposable income is committed to the plan

• Creditors receive the maximum allowed under the law

If your plan ignores the future increase in income, trustees will almost always object.

A properly drafted step-up plan:

• Shows good faith

• Reflects realistic cash flow

• Improves confirmation chances

---

Can I Keep Making 401(k) Contributions During Chapter 13?

This is separate from a 401(k) loan and treated differently.

• Ongoing retirement contributions may be limited

• Trustees often scrutinize contributions

• Some contributions may be allowed depending on:

  • Income level

  • Plan feasibility

  • Local trustee practice

Loan repayment is generally treated more favorably than new contributions.

---

Common Mistakes With 401(k) Loans in Chapter 13

❌ Not disclosing the loan
❌ Failing to list the payoff date
❌ Ignoring the step-up requirement
❌ Assuming the payment can continue for the entire plan
❌ Taking a new 401(k) loan during Chapter 13 (often prohibited)

These mistakes can lead to objections, delays, or dismissal.

---

What Happens If the Loan Is Paid Off Early?

If a 401(k) loan is paid off earlier than expected:

• The trustee may require a plan modification

• Payments may increase sooner

• Failure to disclose changes can create compliance issues

Transparency matters throughout the case.

---

How This Is Treated in Pennsylvania Bankruptcy Courts

In EDPA, MDPA, and WDPA, trustees routinely:

• Allow deduction of existing 401(k) loan payments

• Require step-up plans when loans end

• Review payroll records carefully

District-specific practices may vary slightly, but the underlying rule is consistent.

---

Planning Ahead Matters

The goal of Chapter 13 is a confirmable, sustainable plan — not one that collapses later.

Proper planning allows you to:

• Keep your retirement loan repayment

• Avoid surprises

• Complete your plan successfully

• Protect your discharge

---

Talk to a Chapter 13 Attorney Before Filing

401(k) loans are one of the most misunderstood issues in Chapter 13 cases. Filing without planning for their impact can lead to higher payments, objections, or failed plans.

Ginsburg Law Group helps clients structure Chapter 13 plans that properly account for retirement loans, step-ups, and trustee expectations.

 

---

📞 Call us today for a free, confidential bankruptcy consultation – 855-978-6564 or email us at bankruptcy@ginsburglawgroup.com.

Contact our Bankruptcy Team: bankruptcy@ginsburglawgroup.com

We work with most major legal services and legal insurance plans.  Some cover your legal fees for bankruptcy services.  Give us a call today to see if your bankruptcy is covered!

BANKRUPTCY TEAM

AMY GINSBURG – aginsburg@ginsburglawgroup.com

GRACIE KLEIN – gklein@ginsburglawgroup.com

NICOLE LOMBARDI – nlombardi@ginsburglawgroup.com