For anyone who finds themselves facing the prospect of overwhelming or unmanageable debt, a very common course of action that many consider involves borrowing against a 401K or similar retirement account) to obtain liquid funds which may then be used towards existing or outstanding debts. When this occurs, it creates something known as a 401K loan, which is effectively a loan issued by a financial institution (typically the same institution administering the 401K) that is then in turn secured by the funds deposited in the 401K.
Typically, these funds are then repaid progressively at a predetermined rate of interest until the loan has been satisfied. For those who subsequently find themselves considering bankruptcy, this naturally invites, the question: “What happens to this loan when I file?”
The short answer is that the loan remains in place, under the original terms that it was issued under by the lender. To understand why this is the case, and why it is not subject to the same discharge that other debts such as credit cards and personal loans are eliminated through, we must consider a few things. First – that a 401K loan is fundamentally a secured debt. This, in and of itself, is a significant distinction between a 401K loan and an unsecured debt such as a credit card.
Typically, secured debts can only be fully discharged when the collateral that the loan is held against is surrendered. Thus, a 401K loan could not be discharged without losing the funds that it is secured against. Something further to consider here is that a 401K is also fundamentally distinct from a 401K withdrawal, which is essentially a full or partial cash-out of the funds held in the account, typically involving significant tax penalties.
Due largely to the complex and cumbersome tax implications that the surrender of a 401K account would involve, Congress has decided to make 401K loans non-dischargeable through bankruptcy. For those who still wish to access the funds in their 401K without the accompanying obligation of repayment that exists with 401K loans, the option of an early 401K withdrawal is still available as an alternative.
CALL NOW FOR A FREE STRATEGY SESSION FROM AN MN BANKRUPTCY LAWYER AT LIFEBACK LAW FIRM
Retirement funds are often some of the most significant and substantial assets that an individual person may own, and for someone facing the prospect of unmanageable debt, they may wish to leverage these funds to help address their debt situation. Evaluating how such a 401K loan or 401K withdrawal may subsequently affect a bankruptcy filing can feel like a daunting task, but luckily our experiences attorney are here to assist! So, when the time is right, or when you are ready, please don’t hesitate to reach out to Minnesota’s most kind and helpful bankruptcy law firm by going now to www.lifebacklaw.com.
