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  1. #1
    Join Date
    Apr 2006
    Location
    michigan
    Posts
    3

    Default 401(K) loans taxable income or discharged debt?

    The 401 holding company who manages the funds for my employer will not except the dischage of the loans even though my I have sent them several discharge notices. H.R. block says the loans are a discharged dept yet the 401 people say they will not accept that and refuse to releases the balance of my account untill I pay back the loans. Do I have to reopen the case to get relief ?Are the loans to be considered defaulted and therefore tax able income or are they discarged dept?

  2. #2
    Join Date
    Sep 2005
    Location
    Behind a Desk
    Posts
    98,846

    Default

    According to an article by attorney Edward Fensholt,

    Quote Quoting Dealing with Loan Defaults by a Debtor in Bankruptcy
    Generally speaking, a retirement plan does not have a “claim” (as that term is used in the bankruptcy context) against the employee’s bankruptcy estate for an outstanding loan balance. The consequence of this is that the employee’s obligation to the plan is not discharged (in either a Chapter 7 or Chapter 13 case) because the employee is not considered to have a dischargeable “debt” to the plan. That is, the employee’s obligation to the plan is not avoided by the bankruptcy process.

    Consequently, if an employee in bankruptcy defaults on a plan loan, the bankruptcy rules do not appear to prevent the plan from applying its normal default rules. Thus, if the employee is still employed and an event entitling the employee to a distribution of elective deferrals has not occurred (a “distributable event”), the plan should declare a “deemed” distribution in accordance with IRS regulations governing plan loans. If a distributable event has occurred, the plan may offset the account balance by the amount of the outstanding loan.

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