How does bankruptcy affect your responsibility to pay a 401(k) Loan?

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Question:

How does bankruptcy affect your responsibility to pay a 401(k) Loan?

Answer:

Many people took out loans against their 401k retirement programs over the years to finance additions and upgrades to their houses, pay back debts, or reward themselves with vacations or other perks. These loans were essentially financed by borrowing the money from yourself out of your retirement account. So, if you took out a 401k loan and then declared bankruptcy, what effect does the bankruptcy have on your payments on your 401k loant?  Both types of bankruptcy, Chapter 7 and Chapter 13, deal with 401(k) loan bankruptcy repayments, and both treat them the same way.

  • 401k loans are not discharged during a bankruptcy, and you will still have to repay them, 
  • If you do not repay the loan, it will count as a withdrawal from your 401k retirement savings account, and you will be taxed at the appropriate rate for your tax bracket plus be charged an additional ten percent penalty for withdrawing before reaching the retirement age of 59 ½ years old.  
  • Since 401k loans cannot be forgiven, bankruptcy will not help you with 401k loan payments, and it may be best to consider another option if the high price of monthly 401k loan payments is what is considering you to think about taking bankruptcy in the first place.

Before you declare bankruptcy, you should always make sure that it will actually help you to deal with the specific debts you are struggling with. To get help making sure bankruptcy is the right option for you, you should strongly consider speaking with an experienced lawyer for help.

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