Are Loans From Retirement Plans Dischargeable in Bankruptcy?
If you have borrowed from your retirement account to fund a college education or purchase a home and are now facing bankruptcy, you may be wondering if that loan will be discharge in bankruptcy like many of your other debts.
And the answer is: it depends.
If you file Chapter 7 bankruptcy, a loan from a retirement plan is not subject to discharge. That means you will still have to pay it back. The reason for this is, Chapter 7 bankruptcy discharges debts you owe to others – not to debts you owe to yourself.
If you file Chapter 13 bankruptcy, a retirement plan loan becomes part of your repayment plan for the next three to five years, along with your other debts. You may only be required to pay back a portion, however, and the balance will be discharged at the end of your Chapter 13 bankruptcy.
You should also be aware that if you took out a loan from your retirement plan and are currently having payments automatically deducted from your paycheck, those payments will still continue to be withheld. Although the “automatic stay” that comes with a bankruptcy filing immediately stops collection efforts from creditors, it does not stop your collecting from yourself.
Greg Gilbert
Keith Maynard
