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Can a Chapter 7 Bankruptcy Include a 401k Loan

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  • 12-22-2012, 11:31 AM
    cowboys
    Can a Chapter 7 Bankruptcy Include a 401k Loan
    My question involves bankruptcy in the state of: CA
    I took out a loan on my 401 k several months ago due to some financial hardship. I was hoping that would be able to get me over the hump but it doesn't seem like thats working. I am now contemplating on filing for chapter 7 bankruptcy. Can my chapter 7 bankruptcy include my 401 k loan? The 401 K is through my employer so if I do file for Chapter 7 bankruptcy can that affect my employment in anyway?
  • 12-22-2012, 03:25 PM
    llworking
    Re: Can a Chapter 7 Bankruptcy Include a 401k Loan
    Quote:

    Quoting cowboys
    View Post
    My question involves bankruptcy in the state of: CA
    I took out a loan on my 401 k several months ago due to some financial hardship. I was hoping that would be able to get me over the hump but it doesn't seem like thats working. I am now contemplating on filing for chapter 7 bankruptcy. Can my chapter 7 bankruptcy include my 401 k loan? The 401 K is through my employer so if I do file for Chapter 7 bankruptcy can that affect my employment in anyway?

    No, you cannot discharge the 401k loan in your bankruptcy. You will have to continue making repayments on the 401k loan via your employer, and if you are unable to pay it back in full, then eventually it will become taxable income in the year that your employer determines that it cannot be paid back by you. (usually happens when you are fired, layed off or leave the job).

    Whether or not a bankruptcy will effect your job depends entirely on the nature of your job and your employer.
  • 12-22-2012, 03:29 PM
    Disagreeable
    Re: Can a Chapter 7 Bankruptcy Include a 401k Loan
    A 401k loan is backed by the money in your 401k. If you default, they subtract the amount from there and it becomes a taxable withdraw.
  • 12-23-2012, 05:48 AM
    flyingron
    Re: Can a Chapter 7 Bankruptcy Include a 401k Loan
    Not only taxable, but it's treated as a premature withdrawal, so you'll get hit with a 10% penalty as well.
  • 12-23-2012, 06:01 AM
    Dogmatique
    Re: Can a Chapter 7 Bankruptcy Include a 401k Loan
    This is why 401k loans can be incredibly risky. The borrower SERIOUSLY needs to fully consider every single other option before taking out this loan, and ideally they need to discuss the possible repercussions with a financial adviser or tax professional before doing so.

    (such as llworking ;) )
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