Bankruptcy expert Leon Bayer answers real-life questions.

Dear Mr. Bayer,

I recently filed for Chapter 7 bankruptcy and have a hearing date set.  I work for the State of California and have a §457 Retirement Plan.  I want to borrow money from the plan to pay for a divorce attorney. Will borrowing from my §457 plan affect my bankruptcy? According to the plan, this would be a refinance since I borrowed money from it last year.

Thanks for your help.

—  Lenore  

Dear Lenore,

I am sorry that you have to deal with a bankruptcy and a divorce all in the same year. On the other hand, maybe it’s best to get both of these over with at the same time, so you can start out next year with a new beginning.

Here is the answer to your question. If your §457 plan is willing to let you take this loan, I believe that you can go ahead and do so. If you are represented by a lawyer in your bankruptcy case, I recommend that you show this to your own lawyer for an opinion before acting on this.

Here is the reasoning behind my answer.

 §457 Retirement Plan Funds Are Not Part of the Bankruptcy Estate

Your California State Employee’s IRS Code §457 Retirement Plan is not property of your bankruptcy estate. Even if it was, it would qualify for an exemption. (To learn how exemptions help you protect property in Chapter 7 bankruptcy, see Nolo’s  area on Bankruptcy Exemptions.)  Since the money in your Plan is protected, if your Plan administration will allow you to take the loan, you can do so.

(Learn more about what property is not in your bankruptcy estate, and what that means for you.)

Money Earned Since Your Chapter 7 Filing Is Not Part of the Bankruptcy Estate

The money that you earn after the date you filed your Chapter 7 case is likewise not property of the bankruptcy estate. Therefore you are entitled to spend your current earnings to make the required loan payments.

Court Approval Required in Chapter 13 Bankruptcy

However, if this was a Chapter 13 case, my answer would be different. The required loan payments would reduce the disposable income of someone in a Chapter 13 case, and thus court approval would be required. (Learn more about  Chapter 13 bankruptcy and disposable income in Chapter 13.)

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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