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Guest Article A Cautionary Note to 401k Plan Borrowers and AdministratorsBy Kurt M. Carlson, Creditor's Rights Attorney If a 401k loan stops being repaid, bankruptcy or not, the borrower will have tax consequences and incur a 10% penalty. It was becoming commonplace for people who filed bankruptcy to stop repaying their 401k loan in order to pay other obligations. These folks that filed bankruptcy and stopped paying their 401k loans were losing their retirement savings, paid hefty taxes, 10% penalties, and had to start saving for retirement all over again. On this note, Congress probably did more good than harm by trying to ensure that folks at the end of their financial rope were left with a plan to keep their retirement savings when it passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which became effective on October 17, 2005. This new law forces people who file for Chapter 13 bankruptcy protection to pay back their 401k loans, usually with interest. But no matter what kind of bankruptcy the employee files, Plan Administrators should continue to withhold an employee's automatic 401k loan repayments, and are cautioned not to react to a bankruptcy notice or 'dunning' letter from a bankruptcy attorney. The law is clear; the automatic stay in bankruptcy no longer applies to 401k loan repayments, except in limited situations. See §362(b)(19) of the Bankruptcy Code and quote it to the next bankruptcy attorney who tells you, the Plan Administrator, otherwise. The new law also does not allow a Chapter 13 bankruptcy plan to materially modify the loan repayment schedule. See §1322(f) of the Bankruptcy Code and quote that in response to a plan that seeks to materially modify the loan repayment schedule already in place. Kurt M. Carlson is a corporate bankruptcy attorney specializing in representing creditor's rights in large corporate restructurings and reorganization efforts in Chicago and nationally. He may be reached at 312.876.3800 or kcarlson AT tishlerandwald DOT com. ### 401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise. | ||||
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