401K loan default and Bankruptcy

[SinkingFast]

You should getting a 1099 in the mail some time soon from the investment company that handles the 401K. It will show how much you have left in the plan, if any, how much was charged to you as income in loan default, etc.
I'm no tax expert, but I think you are going to have to pay the 10% penalty for early withdrawal on the amount of the discharge/default. In your case that's $1800. You will also be responsible for taxes on the additional $18K because it became regular earnings in the eyes of the gov't/IRS.

If you structure your withholdings each paycheck so you get back a big refund each year you may not owe much if anything. If you typically get back a smaller refund or sometimes pay when you file your income taxes, you may owe taxes.

Nope. I knew it was a loan all along.

[bkfiler]

You should getting a 1099 in the mail some time soon from the investment company that handles the 401K. It will show how much you have left in the plan, if any, how much was charged to you as income in loan default, etc.

I'm no tax expert, but I think you are going to have to pay the 10% penalty for early withdrawal on the amount of the discharge/default. In your case that's $1800. You will also be responsible for taxes on the additional $18K because it became regular earnings in the eyes of the gov't/IRS.

If you structure your withholdings each paycheck so you get back a big refund each year you may not owe much if anything. If you typically get back a smaller refund or sometimes pay when you file your income taxes, you may owe taxes.

really? tell me that again.

[SinkingFast]

Even though I said "loan default" in my first post, I guess that doesn't count.

As always, you must be right, BK.

Mea Culpa.

[LostOne0069]

From my reading of your question... you're screwed. You didn't default on them until AFTER your bk was done... and since you aren't required to pay back 401k loans, they can't be included in a bankrupcy... since all you have to do to wipe them out is say, "I'm not going to pay them back".... unfortunately this causes a large TAX debt... which... if I read all the bk info here correct... can't be wiped by a bk... which wouldn't matter to you anyway as your bk was finished before you incurred your tax debt by defaulting. Start saving now for that big check you're going to have to write in April.

[newstart]

I'm just curious how do you default on a 401K loan I thought your employer took it directly out of your paycheck to pay it back, I know mine does and the only way they don't is if your quit. If you quit it is due immediately and a penalty applies.

[SinkingFast]

This poster filed Bk, couldn't keep up the 401K payments, claimed hardship, and defaulted on the loan. You can do that. Claim some sort of hardship, usually medical or financial, tell your employer and the company managing the 401K you can't make the payments, and then you are in default.

Another way you can default is if you leave your employer. Voluntary termination or thru lay-off, if you leave your employer, most 401K plans are set up to demand repayment of any 401K loans in full immediately, or you default. Lots of times, in a lay-off situation where many employees are affected, the company will plan for that in advance.

When Hubby got laid off, his company set up a 401K benefit for their employees as part of their termination package. The company was laying-off hundreds of people in the same year. The company arranged with the investment firm to allow the 401K's to auto roll over into traditional IRA's. If you had a loan on your 401K, they would allow you to continue paying, direct to the investment firm, on your normal schedule. You could not take any new loans, tho. And if you did not make your normal payments in a timely manner, it would throw you into default.

[Jman30]

I just came across this thread this morning and I know I am a day late and dollar short on this, but....I work in 401K. I deal with this issue daily. If you are in a Chapter 13 Bankruptcy, you CANNOT continue to pay back that loan through payroll deductions. It is against DOL regulations. You can pay it back IN FULL if you want (but if you had the money to pay it back, you wouldn't be the spot in the first place), but you cannot continue to pay it back through deductions.
The loans will default and become taxable income, period. There is nothing you can do about it.

[bkfiler]

thanks jman, trying to understand this better.

why cant you pay money toward the loan in a chapt 13 plan?

if it was a debt and was discharged then why would you owe taxes?

i realize that this is a 'you borrowed money from yourself, and cant pay yourself back' situation so it gets confusing.

[LostOne0069]

Hey Jman.... is your info up to date compared to the new law changes? I've been let to understand that under the new law you CAN continue to make payments to a 401k loan and they count as a legitimate expense in your bankruptcy.

[SinkingFast]

401K contributions are deducted from your pay check on a pre-tax basis. It's earned income that was not taxed to begin with. That's why it becomes taxable when you take a distribution from the 401K. A distribution can be a cash out request or loan default. Either way, it becomes taxable income.

I wonder why 401K loan repayment wouldn't be allowed in BK too, Lost. Retirements, IRA's, and 401K investments are specifically exempted from being considered assets under the New Law. Why wouldn't you be allowed to continue repaying a pre BK loan??

[bkfiler]

401K contributions are deducted from your pay check on a pre-tax basis. It's earned income that was not taxed to begin with. That's why it becomes taxable when you take a distribution from the 401K. A distribution can be a cash out request or loan default. Either way, it becomes taxable income.

I wonder why 401K loan repayment wouldn't be allowed in BK too, Lost. Retirements, IRA's, and 401K investments are specifically exempted from being considered assets under the New Law. Why wouldn't you be allowed to continue repaying a pre BK loan??

yes i know that. thats for a normal situation.its a little more complicated when you bring a bk into it. my questions are regarding that situation in a bk. not outside it.

i think the problem hinges on being way too lucky to take that money out and then file a bk. if you didnt have to pay tax on it before. then got to use all of the money, and then filed bk and were able not to pay taxes on it again then woooo hooo wouldnt that be a nice gift lol. a little too nice.

[LostOne0069]

bkfiler, I didn't mean that you didn't have to pay the tax if you defaulted... just that, from what I understand, if you are able to keep paying the payments, then you can do so... and the payments are an allowed expense under bankruptcy.

[bkfiler]

bkfiler, I didn't mean that you didn't have to pay the tax if you defaulted... just that, from what I understand, if you are able to keep paying the payments, then you can do so... and the payments are an allowed expense under bankruptcy.

lost one i dont think i disagreed with you. i do agree with what you posted. im just asking additional questions to get more information based on others point of views. i word quesstions based on how they see the situation - not always based on how i understand it. maybe that is the confusion.