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  1. #1
    Join Date
    Oct 2006
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    16,474

    Default Re: Can a Chapter 7 Bankruptcy Include a 401k Loan

    Quote Quoting cowboys
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    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.

  2. #2
    Join Date
    Sep 2010
    Posts
    19,901

    Default 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.

  3. #3
    Join Date
    Apr 2009
    Location
    Somewhere near Canada
    Posts
    35,894

    Default 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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