Impact of Chapter 13 Bankruptcy on Loan

[Guest tracys]

A client of ours has a participant in Chapter 13. The US Bankruptcy Court "order" calls for the loan payments to stop and the client stopped the payments in early 2002. However, the order also states that the loan shall "survive the Plan, and shall be paid by the Debtors after the entry of an Order of Discharge". Does this mean that the loan is not to be deemed defaulted and treated as a taxable distribution? The participant believes that the loan will just remain in suspense for 3 years.

[QDROphile]

The loan can't be distributed until there is a distributable event anyway. The loan will be deemed distributed for tax purposes under the usual rules. When the loan is repaid, the account will have after tax money.

Interesting conflict if the participant terminates employment and the plan would distribute the loan under its usual terms. I don't know if the bankruptcy court can require the plan to hold a loan and accept payments beyond what the plan is designed to do.

[mbozek]

I dont understand the question. The suspension of payments by the bankruptcy ct does not have any impact on whether the loan payments are in default under IRC 72(p). There is no exemption under the loan default provisons for a suspension of payments because of the filing of a bankruptcy petition.