Taking out a lona on a 401K?

[goingout]

Anyone do this? Hypothetically speaking, what would happen if you defaulted on the payments back to yourself?

[HHM]

If you default, you get a HUGE tax penalty from the IRS. And to answer your next possible question, a 401K loan cannot be discharged in BK because, strictly speaking, it is not a loan in the traditional sense.

Based on some of your other posts, if your plan is to borrow against your 401K to pay off debt, my generally advice is not to do it. Reason being, 401k money is exempt in BK (they can't touch it). For most people, if they are candidates for BK, and have a 401K, they are better off filing BK vs. borrowing or withdrawing money from a 401K.

[wayne-o]

I had a loan when I filed my 13. The order to stop paying went to my payroll dept and it would stop for 1 week and then start back up. The company that administered the 401k said that I could and should still pay because it was covered by ERISA (I think). They said I could write them a letter saying I was defaulting and they would stop the payments, but then my loan would be considered a distribution. Bad news in the tax dept...huge penalties and interest. In addition such a move could've limited my ability to participate in the plan further. I only had 8 more payments to go when I filed, so I sucked it up and made them.

[CATCHMEIFYOUCAN]

401k Loan

Anyone do this? Hypothetically speaking, what would happen if you defaulted on the payments back to yourself?

BAD BAD BAD Idea! Trust me, I did it!

Well let me start off by telling you I had 2 full time jobs. 2 401k plans. I owed on both plans on some loans I took out from both jobs. The biggest loan I had was with my day job of $12,000 because I had paid off my car with it. So instead of paying the dealer w/interest I was paying myself back w/interest through the company (automatic deductions from my salary towards the loan plus additional money to the savings itself). Make a long story short, I had about $700 dollars of my salary between the two jobs going to the 401kplan savings and loans. Thank goodness my Trustee didn't blink an eye! I could leave the plan deductions alone plus the additional 8% I was just socking away than.

Well it came down to it that I was in Ch13 plan. And my plan wasn't confirmed because of disposable income issues (nothing to do with the plans).

End result I converted to Ch7 and had to quit my day job. BOOM - there goes my loan into default ! Even though I paid the loan down to $10,000 they reported a $12,000 default! Taxes hit me hard ! ! !

I owed the IRS $5000 with interest and penalitis at the end of 2006 !

I finally just paid it off with a little bit of luck!

Best Wishes, CMIYC

[lrprn]

can overcome trustee objections!

[CATCHMEIFYOUCAN]

I Hear That !

Yes, it's true....we debtors with the help of a good lawyer can overcome trustee objections!

I Hear that! Besides the big loan I had, I had several smaller loans just to pay the stinky creditors (catching up with Paul and Mary borrowing from Peter, you know!) I regret every penny I WASTED !

Don't DO IT! Save your money for future emergencies !

Best Wishes, CMIYC

[treehugger1]

Under the current BK laws, any retirement/TDI loans can be paid prior to disposable earnings. I think there was some confusion among trustees during the shift from old law to new. Still not a good idea to take out a loan against a TDI but sometimes one does. Nice to get a sense of how it will be treated under the reformed BK.